Does CEO inside debt really improve financial reporting quality?

Stefano Cascino, Máté Széles and David Veenman

LSE Research Online Documents on Economics from London School of Economics and Political Science, LSE Library

Abstract: Recent studies conclude that CEO debt-like incentives, such as defined benefit pensions and deferred compensation (“inside debt”), improve financial reporting quality. We challenge this result on conceptual grounds and evaluate its sensitivity to empirical specification. We reexamine the relation between accrual-based measures of financial reporting quality and CEO inside debt variables and find that it is an artifact of correlated omitted factors that prior studies do not effectively control for. Specifically, we show that the relation disappears when we control for factors related to the volatility and uncertainty of firms’ operating environments. Using a two-step approach, we illustrate how the relation between inside debt and accrual-based financial reporting quality measures is driven entirely by the portion of inside debt that is correlated with these factors, rather than a direct effect of inside debt itself. Our findings challenge the prevailing consensus on the incentive effects of inside debt and suggest that prior evidence is likely confounded by omitted variable bias.

Keywords: inside debt; pensions; deferred compensation; executive compensation; incentives; financial reporting quality; accrurals; earnings management; reexamination; replication (search for similar items in EconPapers)
JEL-codes: G32 G33 M41 (search for similar items in EconPapers)
Date: 2025-05-28
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Published in European Accounting Review, 28, May, 2025. ISSN: 0963-8180

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