در جستجوی ایمنی: رابطه بین CEO منابع بدهی درونی و ریسک سرمایه گذاری شرکت و سیاست های مالی

CEO inside debt holdings (pension benefits and deferred compensation) are generally unsecured and unfunded liabilities of the firm. Because these characteristics of inside debt expose the CEO to default risk similar to that faced by outside creditors, theory predicts that CEOs with large inside debt holdings will display lower levels of risk-seeking behavior (Jensen and Meckling, 1976). Consistent with the theoretical predictions, we find a negative association between CEO inside debt holdings and the volatility of future firm stock returns, R&D expenditures, and financial leverage, and a positive association between CEO inside debt holdings and the extent of diversification and asset liquidity. Collectively, our results provide empirical evidence suggesting that CEOs with large inside debt holdings prefer investment and financial policies that are less risky.

The recent near-collapse of global financial markets led to renewed scrutiny of executive compensation practices by journalists, academicians, politicians, and regulators. Much of the scrutiny focused on alleged excesses in the compensation packages of the executives deemed (at least partially) responsible for the economic turmoil (e.g., Karaian, 2008, Rappeport, 2008 and McCann, 2009). However, the financial crisis also highlighted the vulnerability of certain components of firm-specific executive wealth during times of financial distress as several prominent chief executive officers (CEOs) surrendered significant portions of their inside debt holdings (pension benefits and/or deferred compensation) when their firms failed during the crisis.1 Inside debt holdings are at risk because they generally represent unsecured and unfunded liabilities of the firm, rendering these executive holdings sensitive to default risk similar to that faced by other outside creditors (Sundaram and Yermack, 2007 and Edmans and Liu, 2011).2 We investigate whether CEOs with large inside debt holdings protect the value of their holdings by implementing less risky investment and financial policies. In a corporate setting characterized by the separation of ownership and control, agency conflicts arise due to differences in the incentive structures of principals (shareholders and debt holders) and agents (CEOs). Agency conflicts between CEOs and shareholders arise because CEOs bear the entire cost of their efforts to generate returns for shareholders, but retain only a portion of the returns as compensation for their efforts. Moreover, because CEO wealth is generally less diversified than that of shareholders, CEOs tend to have a lower risk-appetite than what shareholders would prefer (Jensen and Meckling, 1976). A large body of research has investigated compensation mechanisms designed to mitigate the costs associated with these agency conflicts. In general, the results suggest that equity holdings (e.g., stock and stock options) encourage risk-averse CEOs to manage their firms in ways that benefit shareholders (see, e.g., Guay, 1999, Coles et al., 2006 and Low, 2009).3 Agency conflicts between managers and debt holders arise when managers increase firm risk (e.g., through firm investment and financial policies) in ways that benefit shareholders at the expense of debt holders (Jensen and Meckling, 1976 and Dewatripont and Tirole, 1994). Debt holders prefer firms to be more conservative because debt holdings are characterized by an asymmetric payoff function with respect to the firm's net assets (Watts, 2003). While payoffs are fixed (at the nominal interest rate) when firm performance is good, debt holders face substantial risk if firm performance is poor (i.e., if the firm goes bankrupt). Thus, equity-based compensation can lead to behavior which negatively impacts debt holders because excessive risk-taking can contribute to an increased probability of default. This so-called “asset substitution” or “risk-shifting” problem is generally referred to as the agency cost of debt. Jensen and Meckling (1976) theorize that inside debt holdings encourage CEOs to make investment and financing decisions which mitigate the agency costs of debt. Because inside debt obligations are unsecured, unfunded, and payable at a future date, CEOs (like outside creditors) face asymmetric payoffs with respect to firm performance. That is, the value of CEO inside debt holdings is sensitive to both the probability of bankruptcy and the liquidation value of the firm in the event of bankruptcy or reorganization (Edmans and Liu, 2011). This unique characteristic suggests that inside debt holdings could help improve the alignment of CEO and debt holder incentives by encouraging managers to make decisions which reduce the overall risk of the firm. Inside debt holdings are prevalent and often substantial (Sundaram and Yermack, 2007). Wei and Yermack (2011) find that 84% of CEOs in their sample hold some form of inside debt and that average inside debt holdings are approximately $10 million for sample CEOs. Despite its widespread use, limited disclosure requirements have hindered researchers’ ability to investigate the implications of debt-like CEO holdings. However, recent empirical research provides preliminary evidence on the implications of CEO inside debt holdings.4Sundaram and Yermack (2007) document a positive association between CEO inside debt holdings and the distance to default.5Wei and Yermack (2011) find that initial disclosures of CEO inside debt positions (in early 2007) generated increases in existing bond prices, decreases in equity prices, and decreased volatility for both types of securities. Several recent studies find a negative association between inside debt holdings and the cost of debt (Anantharaman et al., 2010 and Wang et al., 2010a), the use of restrictive covenants in debt contracts (Anantharaman et al., 2010, Chava et al., 2010, Chen et al., 2010 and Wang et al., 2010a), and accounting conservatism (Chen et al., 2010 and Wang et al., 2010b). Other studies find that inside debt holdings are associated with higher firm liquidation value (Chen, Dou, and Wang, 2010) and lower credit default swap spreads (Bolton, Mehran, and Shapiro, 2010). A common thread among the previously discussed studies is that the authors conjecture, but do not test, that their results are attributable to an expected negative association between CEO inside debt holdings and the riskiness of firm policy choices. To illustrate, Wei and Yermack (2011, p. 7) state, “to the extent that managers have large unfunded deferred compensation claims against their firms, outside investors expect them to manage their firms conservatively, implying lower-risk investment strategies that would tend to make debt safer and equity less attractive. ”Because prior research has largely focused on market implications of CEO inside debt holdings, there is little evidence on (1) whether there is, in fact, a negative association between CEO inside debt holdings and the riskiness of firm policy choices, or (2) the specific mechanisms through which CEOs with large inside debt holdings manage their firms more conservatively. 6 Our study seeks to fill this gap in the literature by examining the association between CEO inside debt holdings and a comprehensive set of measures which capture the riskiness of firm investment and financial policies (e.g., the extent of R&D expenditures, firm diversification, asset liquidity, and financial leverage). Our sample consists of 2,994 firm-year observations with complete compensation and financial data from 2006 through 2008. Following the theoretical predictions of Jensen and Meckling (1976) and Edmans and Liu (2011), as well as recent empirical applications (Sundaram and Yermack, 2007 and Wei and Yermack, forthcoming), our construct of interest is the relative (to the firm) CEO debt-to-equity ratio. Because prior work has employed several empirical proxies to capture this construct, we perform tests using four measures: the CEO's debt-to-equity ratio scaled by the firm's debt-to-equity ratio (Sundaram and Yermack, 2007 and Edmans and Liu, 2011); an indicator variable set equal to one if the first measure exceeds one, and zero otherwise (Sundaram and Yermack, 2007)7; the relative incentive ratio developed by Wei and Yermack (2011), which focuses on the effect of marginal changes in CEO wealth (including CEO inside debt and equity holdings) associated with unit changes in firm value; and the relative incentive ratio adjusted for the present value of expected future cash compensation. We expect that larger relative CEO debt-to-equity ratios imply greater incentive alignment with debt holders, and hence, we predict that risk-seeking behavior will be lower. The results are consistent with the theoretical predictions. We find a negative association between our measures of the relative CEO debt-to-equity ratio and future stock return volatility. Additional analyses reveal that the decrease in the volatility of future stock returns can be partially explained by more conservative investment and financial policies. Specifically, research and development (R&D) expenditures are lower and firm diversification is higher when relative CEO debt-to-equity ratios are larger. We also document a positive association between the relative CEO debt-to-equity ratio and working capital (a measure of firm asset liquidity) and a negative association between the relative CEO debt-to-equity ratio and financial leverage. In general, we find consistent results for each of the relative CEO debt-to-equity ratio measures described above. We also find consistent results when we examine the association between the relative CEO debt-to-equity ratio and future firm stock return volatility and investment and financial policy choices (i.e., where the dependent variables we consider are constructed over time horizons up to year t+3), and when we control for the potential endogeneity between CEO compensation and the riskiness of firm investment and financial policy choices. Our paper makes several important contributions. First, our study complements and extends the literature which investigates the incentive effects of various components of CEO wealth. To date, this work has focused primarily on the implications of CEO equity holdings and finds that this form of compensation provides increased risk-taking incentives, on average (see, e.g., Guay, 1999, Rajgopal and Shevlin, 2002 and Coles et al., 2006). On the other hand, some studies find that specific types of CEO equity holdings (e.g., in-the-money options) could lead to higher levels of CEO risk aversion (see, e.g., Lambert et al., 1991 and Lewellen, 2006). We depart from this line of research in that we focus on a different component of CEO wealth and find that inside debt holdings can induce CEOs to become more risk-averse. While our study differs from those investigating the implications of CEO equity holdings in terms of the component of CEO wealth we investigate, we believe that our study provides evidence on the importance of investigating individual components of CEO wealth and their effects on CEO risk-taking incentives. Second, our study provides an important contribution to an emerging stream of empirical research which investigates the theoretical prediction that inside debt holdings strengthen the alignment of CEO and debt holder incentives (Jensen and Meckling, 1976 and Edmans and Liu, 2011). To date, extant research (Anantharaman et al., 2010, Chen et al., 2010, Wang et al., 2010a and Wei and Yermack, forthcoming) has focused on market-based implications of CEO inside debt holdings (e.g., a reduced cost of debt, fewer restrictive debt covenants, etc.). In contrast, we provide direct evidence on several specific mechanisms through which these implications might be realized. Documenting the effect of CEO inside debt holdings on firm investment and financial policies is important because such policies could have implications beyond those investigated in prior work.8 Finally, we contribute to the literature which investigates the factors (e.g., corporate governance, ownership structures, investor protection, etc.) that affect the riskiness of corporate policy choices (see, e.g., Agrawal and Mandelker, 1987, John et al., 2008 and Laeven and Levine, 2009). Our results, which suggest that inside debt holdings can dampen CEOs’ risk-seeking behavior, are particularly relevant in light of the role that risky policy choices allegedly played in the recent financial crisis. Thus, we expect that our results will be of interest to regulators who are interested in the effects that CEO compensation packages can have on managerial behavior. The remainder of the paper is organized as follows: Section 2 develops our hypotheses. Section 3 describes the sample, the measurement of our variables, and the empirical design. Section 4 reports the results of our primary tests and sensitivity analyses. The final section concludes the paper.

Understanding the incentive effects of inside debt holdings (pension benefits and/or deferred compensation) is important because the use of inside debt as a form of executive compensation is prevalent, the magnitude of CEO inside debt holdings is often substantial and, more importantly, there is limited empirical evidence on the effect of inside debt holdings on firm investment and financial policies (Sundaram and Yermack, 2007). While extant research (Anantharaman et al., 2010, Chen et al., 2010, Wang et al., 2010a and Wei and Yermack, forthcoming) has focused on the market implications of CEO inside debt holdings (e.g., a reduced cost of debt, fewer restrictive debt covenants, etc.), our study is the first broad-based study to investigate the specific mechanisms through which these implications might be realized. Specifically, building on the theoretical predictions of Jensen and Meckling (1976) and Edmans and Liu (2011), we investigate whether CEOs with large inside debt holdings prefer investment and financial policies that are less risky. We find that the volatility of future firm stock returns is lower when CEO inside debt holdings are large and that the reduction in volatility is (at least partially) realized through an increase in the conservative nature of firm investment and financial policies. Specifically, we find a positive association between CEO inside debt holdings and diversification and asset liquidity, and a negative association between CEO inside debt holdings and R&D expenditures and financial leverage. We believe that our findings are important because the differences in firm investment and financial policies that we document could have implications beyond the market-based implications shown by prior research. We expect that our results will be of interest to researchers who investigate the incentive effects of CEO compensation components, to investors (shareholders and debt holders) who wish to assess the extent to which CEO preferences are aligned with their own, and to regulators who are interested in the effects that CEO compensation packages can have on managerial behavior.