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Article
Publication date: 1 April 2020

Shahbaz Sheikh

The purpose of this paper is to empirically examine the relation between incentives from CEO inside debt (deferred compensation and pension benefits) and corporate social…

Abstract

Purpose

The purpose of this paper is to empirically examine the relation between incentives from CEO inside debt (deferred compensation and pension benefits) and corporate social responsibility (CSR).

Design/methodology/approach

Instrumental variable (IV-GMM) regressions are used to estimate the relation between CEO inside debt and CSR.

Findings

The results of this paper indicate that CEOs with large inside debt tend to invest more in CSR. Analysis of CSR strengths and concerns supports this finding and shows that CEO inside debt is significantly positively (negatively) associated with CSR strengths (concerns). Further tests indicate that CEO inside debt exerts a positive and significant effect on all five dimensions of social performance (diversity, community, product, employee relations and environment).

Research limitations/implications

The results of this study are based on US corporations. Future research should investigate if these results hold for firms in other countries in order to better our understanding of the relation between CEO inside debt and CSR.

Practical implications

CEOs use CSR as a risk management strategy to reduce corporate risk in order to protect the value of their inside debt.

Social implications

The results in this paper provide a practical tool to boards of corporations to increase investment in CSR. The results suggest that boards can encourage CEOs to invest in CSR by increasing incentives from inside debt.

Originality/value

This study contributes to the literature that examines the relation between inside debt and CSR by showing that CEO inside debt exerts a positive impact on CSR.

Details

International Journal of Managerial Finance, vol. 16 no. 4
Type: Research Article
ISSN: 1743-9132

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Article
Publication date: 8 April 2019

Shahbaz Sheikh

The purpose of this paper is to investigate the effect of market competition on the relation between CEO inside debt and corporate risk-taking.

Abstract

Purpose

The purpose of this paper is to investigate the effect of market competition on the relation between CEO inside debt and corporate risk-taking.

Design/methodology/approach

Ordinary least squares regressions are used to estimate the relation between CEO inside debt and firm risk. Additionally, instrumental variable (IV-GMM) regressions are used to check the robustness of the results.

Findings

The results of this paper indicate that CEO inside debt is negatively associated with the measures of future risk. However, this negative association is influenced by market competition. Specifically, CEO inside debt results in lower levels of firm risk when market competition is high. When market competition is low, inside debt has no effect on firm risk. Additional results show that CEOs with large inside debt tend to decrease R&D investments and financial leverage and increase firm cash holdings and working capital only when market competition is high. Overall, these results suggest that market competition significantly influences the effect of CEO inside debt on corporate risk-taking by changing the strength of incentives from inside debt.

Practical implications

CEO inside debt could be used to provide incentives to CEOs to manage corporate risk-taking.

Social implications

The empirical results in this paper provide a practical tool to the boards of corporations to manage corporate risk-taking. The results suggest that boards can reduce excessive risk-taking by increasing the level of debt type compensation incentives. However, this strategy is effective only when market competition is high because in such markets inside debt provides the strongest incentives to reduce corporate risk. When competition is low, incentives from inside debt are ineffective in managing corporate risk-taking.

Originality/value

This is the first study that shows that the negative association between CEO inside debt and corporate risk-taking critically depends on the intensity of market competition.

Details

International Journal of Managerial Finance, vol. 15 no. 4
Type: Research Article
ISSN: 1743-9132

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Article
Publication date: 7 September 2015

Ran Lu-Andrews and Yin Yu-Thompson

The authors intend to perform empirical analysis to test the theory proposed by Edmans and Liu (2011) that CEOs with more debt-like compensations care more about the…

Abstract

Purpose

The authors intend to perform empirical analysis to test the theory proposed by Edmans and Liu (2011) that CEOs with more debt-like compensations care more about the liquidation value of the firm. The purpose of this paper is to examine the relations between CEO inside debt ratios and tangible assets (i.e. asset tangibility, liquidation value, and fixed asset investment).

Design/methodology/approach

The authors use the Ordinary Least Square (OLS) contemporaneous and lead-lag regression analyses. They also use two-stage least-square (2SLS) regression analysis for robustness check.

Findings

The findings are fourfold: first, CEO inside debt has a positive effect on asset tangibility of the firm; second, CEO inside debt has a positive effect on the liquidation value of the firm; third, CEO inside debt has a positive effect on the tangible asset investment (as measured by capital expenditures) of the firm; and fourth, these positive effects are found in both the contemporaneous year and the subsequent year and in both OLS and 2SLS frameworks. The research provides further evidence that CEOs with higher inside debt holdings exhibit safety-seeking behavior. The authors document direct proof for the theory proposed by Edmans and Liu (2011) that these CEOs, like any creditors, care a great deal of the asset tangibility and liquidation value of the firm.

Originality/value

This study contributes to the existing literature by providing further empirical evidence to support that CEO inside debt holdings have impacts on firm investment decisions and capital allocations. Inside debt does help align the executive managers’ personal incentive with firms’ value, and mitigate the agency conflicts between managers and debt holders. This study provides significant empirical evidence to support the theory suggested by Edmans and Liu (2011) that CEOs with higher level of inside debt holdings do care a greater deal about the asset liquidation value of the firm, and these firms tend to invest more in tangible assets to preserve the liquidation value.

Details

International Journal of Managerial Finance, vol. 11 no. 4
Type: Research Article
ISSN: 1743-9132

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Article
Publication date: 10 August 2015

Yin Yu-Thompson, Seong Yeon Cho and Liang Fu

The purpose of this study is to examine how pension risk shifting can be explained and constrained by debt component in chief executive officer (CEO) compensation and to…

Abstract

Purpose

The purpose of this study is to examine how pension risk shifting can be explained and constrained by debt component in chief executive officer (CEO) compensation and to explore whether a CEO’s relatively large holdings of inside debt to equity compensation would result in a well-funded pension status.

Design/methodology/approach

The authors use two-stage least-squares model to control the potential unobserved and uncontrolled firm characteristics that could drive both CEO inside debt determinants and firm pension funding status.

Findings

This paper finds a positive relationship between the CEO inside debt ratio and firm funding status. Additional tests show a positive association between the CEO inside debt ratio and financial slack measures and a negative association between this ratio and financial constraint measure. Additional evidence also shows that the CEO inside debt ratio is negatively associated with other contemporaneous investment activities. Overall, the findings suggest that CEO inside debt creates managerial incentives that can affect pension funding decisions and decrease pension risk shifting.

Research limitations/implications

One of the difficulties facing the compensation literature is the unobservable nature of the entire compensation negotiation and design process. Pension funding status is another challenging topic given that management has discretion over the pension assumptions and the calculations themselves are complicated. Therefore, the determinants of pension status used in this paper are not all-inclusive. Although a two-stage least-squares methodology is applied to mitigate endogeneity, it is still possible that an omitted variable problem exists in both cases.

Originality/value

This study provides direct evidence of the executive debt-like compensation’s effect on pension risk-shifting behavior and pension funding decisions and also contributes to the literature that investigates the association between CEO inside debt and firm risk by examining the trade-off between pension funding and other contemporaneous investment activities.

Details

Review of Accounting and Finance, vol. 14 no. 3
Type: Research Article
ISSN: 1475-7702

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Article
Publication date: 1 April 2014

Raul Seppa

Small privately held firms extensively use debt provided by principal owners and households (inside-debt) as an alternative capital source to straight equity capital. The…

Abstract

Purpose

Small privately held firms extensively use debt provided by principal owners and households (inside-debt) as an alternative capital source to straight equity capital. The purpose of the research study is to investigate inside-debt-bankruptcy relations.

Design/methodology/approach

Inside-debt-bankruptcy relation is tested on three prominent bankruptcy prediction models using correlation and logit regression analysis. Sample consists of 314 Estonian small firms. Financial reports of 2007 are modelled against bankruptcies declared in 2009.

Findings

Results imply that users of inside-debt are less profitable; they have weaker liquidity position and less retained earnings. Leverage is not found to be significant determinant between inside-debt users and non-users. Fundamental finding of the study suggests that the use of inside-debt is significantly and positively related to bankruptcy probability. While inside-debt carries no risk elements per se, findings are robust to indicate that the use of inside-debt has significant power to signal for increasing bankruptcy risk and as such, reducing information asymmetry of small firms.

Research limitations/implications

This study is limited to single country data. Bankruptcy data fall to the period of economical recession. It is suggested to repeat the study in a normal economical situation and to extend sample size over different countries.

Practical implications

Findings contribute to the understanding of firms' financial risk, firm behaviour and capital structure development. In a lending industry, results shall supplement to prudent credit risk assessment techniques and design of bankruptcy models in general.

Originality/value

To the author's best knowledge, inside-debt-bankruptcy relation is not studied so far in the existing academic literature.

Details

Baltic Journal of Management, vol. 9 no. 2
Type: Research Article
ISSN: 1746-5265

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Article
Publication date: 12 April 2018

Randy Beavers

This paper aims to examine jointly the CEO inside debt and firm debt to further investigate the compensation incentives on risky decision-making and the resulting…

Abstract

Purpose

This paper aims to examine jointly the CEO inside debt and firm debt to further investigate the compensation incentives on risky decision-making and the resulting financial policy decisions concerning the debt structure of the firm.

Design/methodology/approach

Using S&P 1500 data from CRSP, Compustat, Execucomp and Capital IQ between 2006 and 2011, statistical analysis and regression models are used to determine potential correlations between the variable of interest, inside debt and debt control variables, including specialization.

Findings

Firms with high inside debt specialize in commercial loans and drawn credit lines. Larger firms diversify their debt holdings among commercial instruments and senior bonds. As firm size increases with inside debt, the effects are counteracted. Larger firms with high CEO inside debt have lower interest rates on these debt instruments and shorter maturities, suggesting a more conservative financing policy with regards to debt.

Research limitations/implications

Debt diversification is partially affected by compensation in the form of inside debt. Future studies of debt diversification should include CEO compensation controls.

Practical implications

For struggling companies or for those that want to return to a conservative financial policy, they can influence the CEO to make this decision by deferring his compensation to retirement.

Originality/value

This paper considers debt policy through the lens of a key decision maker, the CEO, and uses compensation as an incentive to determine what choices are made concerning debt.

Details

Corporate Governance: The International Journal of Business in Society, vol. 18 no. 4
Type: Research Article
ISSN: 1472-0701

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Book part
Publication date: 19 September 2014

Alicia Robb and Robert Seamans

We extend theories of the firm to the entrepreneurial finance setting and argue that R&D-focused start-up firms will have a greater likelihood of financing themselves with…

Abstract

We extend theories of the firm to the entrepreneurial finance setting and argue that R&D-focused start-up firms will have a greater likelihood of financing themselves with equity rather than debt. We argue that mechanisms which reduce information asymmetry, including owner work experience and financier reputation, will increase the probability of funding with more debt. We also argue that start-ups that correctly align their financing mix to their R&D focus will perform better than firms that are misaligned. We study these ideas using a large nationally representative dataset on start-up firms in the United States.

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Article
Publication date: 17 October 2008

Antonios Antoniou, Yilmaz Guney and Krishna Paudyal

This paper aims to investigate the determinants of choice between private and public debt for British and German listed companies.

Abstract

Purpose

This paper aims to investigate the determinants of choice between private and public debt for British and German listed companies.

Design/methodology/approach

The paper is based on three strands of theories: the “liquidation and renegotiation” hypothesis; the “moral hazard and adverse selection” hypothesis; the “flotation cost” hypothesis. The regression analysis was adopted to test these hypotheses. The specific econometric method used for panel data is generalised method of moments (GMM).

Findings

The evidence records a few similarities in debt‐mix structure of German and UK firms but it also detects some important differences. Therefore, the paper concludes that the relation between dependent and explanatory variables is country‐dependent. This can be attributed to the differences in corporate governance mechanisms and institutional features of the countries.

Research limitations/implications

The limitation mainly has come from data unavailability for public debt. Future research could be to extend the number of countries to have a better idea for the impact of institutional factors on corporate debt‐mix.

Practical implications

The findings confirm that the debt ownership decision of listed firms is not only the result of their own characteristics but also the outcome of legal and financial environment and corporate governance traditions in which they operate. The way managers decide about the type of debt financing is not universal. Furthermore, the factors such as liquidation and renegotiation, moral hazard and adverse selection, flotation costs are found to be significantly relevant while deciding the mix of corporate debt.

Originality/value

This study offers a unique comparison of the evidence from a bank‐based economy (Germany) and a market‐based economy (UK) that should have direct implications on the choice between bank debt and public debt. Firms with a long‐run debt ownership target attain it through an adjustment process. The authors are not aware of any other study on debt ownership that controls for endogeneity using the GMM technique.

Details

Managerial Finance, vol. 34 no. 12
Type: Research Article
ISSN: 0307-4358

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Article
Publication date: 1 May 2001

M. Shahid Ebrahim and Tan Kai Joo

This paper studies the current realities of the Islamic banking system of Brunei Darussalam from the perspective of the theories of modern financial intermediation and…

Abstract

This paper studies the current realities of the Islamic banking system of Brunei Darussalam from the perspective of the theories of modern financial intermediation and Islamic financial contracting. The limited information on the banking system of Brunei Darussalam reveals that the first phase of the Islamic banking experimentation has been successful, as Islamic banks command roughly 11.5 per cent of the market share. The financial services industry, however, remains extremely competitive and Islamic banks face formidable challenges from conventional banks. Islamic banks can proliferate if they: advance towards the second phase by gradually consolidating retail banking with investment banking; establish vital links with local and foreign institutions; and use ijtihad in modern financial engineering to optimally design loans while simultaneously reducing their risk exposure. An efficient Islamic financial system can allocate limited capital resources to the most profitable ventures and assist in wealth creation. This can foster the growth not only of Negara Brunei Darussalam but also of the regional economies, particularly at this crucial juncture when Asian economies are reeling from the current financial crisis.

Details

International Journal of Social Economics, vol. 28 no. 4
Type: Research Article
ISSN: 0306-8293

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Article
Publication date: 14 May 2018

Mohamed Belkhir, Sabri Boubaker and Kaouther Chebbi

The purpose of this paper is to investigate the relationship between corporate debt-like compensation and the value of excess cash holdings.

Abstract

Purpose

The purpose of this paper is to investigate the relationship between corporate debt-like compensation and the value of excess cash holdings.

Design/methodology/approach

The sample comprises 876 US firms covered by ExecuComp over the period 2006-2013. The authors apply the valuation regression of Fama and French (1998) to examine the marginal value of excess cash as a function of CEO inside debt holdings.

Findings

This paper proposes one hypothesis. The results constitute evidence that the value of excess cash to shareholders declines as CEO inside debt increases. More interestingly, excess cash holdings contribute less to firm value when shareholders expect their value to be destroyed due to managers’ conservative behavior.

Research limitations/implications

The sample comprises only US firms, owing to a lack of firms data from other countries. It would be interesting to conduct future research on an international sample.

Practical implications

This paper contributes to a deeper understanding of investor valuation of excess cash in the presence of CEO inside debt. The findings complement previous studies on US firms by confirming the existence of a relationship between the agency costs of debt and firm policy decisions.

Originality/value

This work is, to the best of the authors’ knowledge, the first to examine the relationship between debt-like compensation and excess cash valuation, and it supports the view that the conflict between shareholders and debtholders largely affects firm cash policy, and hence, cash valuation.

Details

Journal of Applied Accounting Research, vol. 19 no. 2
Type: Research Article
ISSN: 0967-5426

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