Two Essays on CEO Inside Debt Holding in Relation to Firm Payout Policy and Financial Reporting

Abstract

This dissertation is a thorough examination of CEO inside debt holding, and consists of two essays. The first essay focuses on the relationship between CEO inside debt and firm payout policy. Previous studies document that higher CEO inside debt is associated with lower firm payout which is explained by CEO’s motivation to preserve cash either in order not to default on debt obligations or in order to keep cash available for his future pension benefits. This study investigates how do excess cash, overinvestment risk, and firm-specific information asymmetry affect this negative relationship, and examines net payout to shareholders as well as cash payout to both shareholders and bondholders. The results provide several valuable insights. First, CEO inside debt is positively associated with net payout, and negatively associated with cash payout in general. Second, while excess cash has only a weak effect, the impact of overinvestment risk is not significant. Third, CEO with inside debt increases payout in the presence of firm-specific information asymmetry. This implies that CEO conveys information to less informed shareholders although his interests are aligned with those of bondholders’. Overall results support the notion that CEO inside debt can be misaligned over time. Abundant research notwithstanding suggest that higher CEO inside debt is associated with more conservative corporate policies, including lower likelihood of earnings management. The second essay of this dissertation focuses on the relationship between CEO inside debt and firm financial reporting. First, it examines the relationship between CEO inside debt and absolute value of abnormal accruals, earnings smoothing, earnings predictability, and earnings quality. Second, it contributes to CEO compensation and earnings management literatures by investigating the moderating effects of various CEO attributes such as overconfidence, narcissism, power, tenure, quality, ability, education, and gender on the above mentioned relationships. The main tenet of the second essay is that CEO may have strong attributes which may enable him to adopt corporate policies that are different than what his compensation enforces. The empirical evidence show that only CEO tenure, quality, and education have significant moderating effects on the relationship between CEO inside debt and earnings predictability, and earnings quality. These results imply that CEO attributes are not strong enough to enable CEO to make corporate decisions that are contradicting with what is mandated by his compensation package.