Abstract

ABSTRACTThis paper investigates whether and how the chief executive officer (CEO)'s inside debt holding influences a firm's investment policy. Our evidence on a sample of US S&P 1500 firms indicates that CEO inside debt can significantly improve investment efficiency and help to overcome both over‐investment and under‐investment, suggesting that the CEO's higher positions of inside debt can lead to optimal investment decisions. The results are robust when we use PSM, entropy balancing, the Heckman two‐stage method and the lagged value of the independent variables to mitigate the endogeneity concerns and other robustness checks. Furthermore, we document that the effectiveness of the CEO inside debt on investment is not sensitive to agency problems, as well as financial constraints. Overall, we confirm the importance of investigating the effect of managerial inside debt holdings on corporate capital investment and provide new insights into how inside debt mitigates agency problems.

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