Does CEO inside debt compensation benefit both shareholders and debtholders?
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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.
KeywordsInside debt Dividend policy Firm valuation Agency theory
JEL ClassificationG32 G34 G35
We would like to thank Cheng-Few Lee (the Editor), an anonymous referee, Randy Beavers (discussant), Hongrui Feng (discussant), Yili Lian (discussant), Claire Lending, Raghavendra Rau, James Weston (discussant), and seminar participants at the 2015 Southwestern Finance Association Annual Meeting, the 2015 Midwest Finance Association Annual Meeting, the 2013 Financial Management Association Annual Meeting, and the 2012 Southern Finance Association Annual Meeting for their many insightful and constructive comments and suggestions.
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