CEO Inside Debt and Firm's Maturity Structure of Debt

Abstract

This study examines managerial compensation incentives and its impact on firm’s financial decisions. Specifically, we examine how CEO’s inside-debt based compensation incentives (pension benefits and other deferred compensation) influences firm’s debt maturity structure. We examine this relationship in the context of the hypothesis that CEO’s inside-debt based incentives exposes managers to similar kind of default risk as any other unsecured risky debt, which may change their risk preferences that may have an influence on firm’s financial decisions. Empirical evidence of this study supports a view that when manager’s ex-ante incentives for substituting risky assets over safe assets is low (that is, higher CEO-debt based incentives as compared to equity-based compensation incentives), creditors allow firms maintain long-maturity debt since high inside debt-based incentives can substitute for the monitoring incentive mechanism of short-term debt.