Does inside debt help mitigate agency problems? The case with investment inefficiency and payout policies

Asligul Erkan and Trung Nguyen

Finance Research Letters, 2021, vol. 39, issue C

Abstract: Although the literature has established that CEO inside debt induces risk aversion, it remains inconclusive whether these CEOs increase firm payout or not. While some studies show that high inside debt CEOs increase firm payout to avoid risky projects, others document that they reduce payout to preserve funds. This study addresses this contradiction by examining a sample of U.S. firms over the 2006–2018 period. Consistent with the agency theory, our results show that CEOs with larger inside debt adjust payout policies to mitigate prior overinvestment. Specifically, they increase payout in the subsequent period if their firm is already overinvested.

Keywords: Agency theory; Executive compensation; Inside debt; Payout policy; Overinvestment (search for similar items in EconPapers)
JEL-codes: G30 G34 G35 G39 (search for similar items in EconPapers)
Date: 2021
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:finlet:v:39:y:2021:i:c:s1544612319308840

DOI: 10.1016/j.frl.2020.101560

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