Cen, Wei. 2011. Essays
On CEO Inside Debt. Doctoral Dissertation, Cornell University.
Executive defined benefit
pensions and deferred compensation are known as "inside debt". The
reason is that their values depend on the ability of the firm to make future
payments to its participant employees. Such plans have the potential of
mitigating the risk-shifting problem of managers (Jensen and Meckling (1976))
because executives who own inside debt are worried about firm default risk and
not only about shareholder return. In this dissertation, I examine the
determinants of CEO inside debt and its components. I then use the inside debt
as a measure of CEO risk preferences and examine its relation to firms' risk. In
Chapter one, I use the new SEC disclosure rule of 2006 to examine the
determinants of CEO inside debt. I find that CEOs defer a larger fraction of
their compensation when their cash compensation is high, firm liquidity is
high, firm default risk is low, and when executive personal wealth is high.
These findings are consistent with CEOs choosing to defer compensation when
they least need the money and when they do not expect the firm to default. In
contrast to previous studies, I find a non-linear inverted U-shape relation
between firm leverage and CEO inside debt. In particular, CEOs reduce their
inside-debt when the firm is highly levered. Using novel data from executive
deferred compensation, Chapter two presents new evidence on the relationship
between CEO risk preference and firm risk (the volatility of firm performance
measures such as stock return, earnings and operating cash flows). My results
show a negative association between the CEO risk aversion (as measured by
realized performance on inside debt) and the volatility of firm market
performance: Firms with risk-averse CEOs have experience less stock price
volatility. I also find that firms providing deferred compensation plans have
lower performance volatility. The results contribute to the inside debt
literature by showing that debt compensation is related to lower firm risk and
lower firm market value.
No comments:
Post a Comment