Does CEO inside debt compensation benefit both shareholders and debtholders?

Nilakshi Borah (), Hui Liang James () and Jung Chul Park ()
Additional contact information
Nilakshi Borah: University of Wisconsin-La Crosse
Hui Liang James: University of Texas at Tyler
Jung Chul Park: University of South Florida

Review of Quantitative Finance and Accounting, 2020, vol. 54, issue 1, No 6, 159-203

Abstract: Abstract We examine whether the proportion of CEO inside debt holdings (pension and deferred compensation) to stock holdings benefit both shareholders and debtholders by relating CEO inside debt to a firm’s dividend payout policies. Based on the positive association of CEO inside debt and the propensity and the size of the dividend payout, we find that firms paying their CEOs with large inside debt present the lower cost of debt and default risk, and these benefits transfer to better firm performance and valuation. Moreover, we find that CEO inside debt is related to superior firm performance only in dividend-paying firms. Dividends tend to increase when firms with high agency costs of equity use inside debt. We conclude that dividends serve as a channel through which CEO inside debt compensation mitigates both agency costs of debt and agency costs of equity.

Keywords: Inside debt; Dividend policy; Firm valuation; Agency theory (search for similar items in EconPapers)
JEL-codes: G32 G34 G35 (search for similar items in EconPapers)
Date: 2020
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Citations: View citations in EconPapers (4)

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DOI: 10.1007/s11156-018-00786-0

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