Market Reactions to CEO Inside Debt Holdings

by Jim Naughton, for The Harvard Law School Forum at Harvard Law School, January 12, 2010.

In our recently updated working paper Stockholder and Bondholder Reactions to Revelations of Large CEO Inside Debt Holdings: An Empirical Analysis, we investigate investor reactions to the first disclosures of the values of CEOs’ pensions and deferred compensation. These two items together comprise managers’ “inside debt” claims against their firms, since each represents a fixed liability owed by the companies to their executives at a future date.

We identify 231 companies whose CEOs have positive inside debt holdings and whose proxy statements with 2006 compensation data are filed in early 2007 during the first wave of disclosures under the SEC’s new executive compensation disclosure regulations. About 45% of these CEOs have excessive inside debt, as their personal inside debt-equity ratios exceed the external debt-equity ratios of their firms. As expected, we find evidence of transfers of value away from equity and toward debt upon revelations that top managers hold large pension and deferred compensation claims. Our results show that bond prices rise, equity prices fall, and the volatility of both securities drops at the time of disclosures by firms whose CEOs have large inside debt…(continue reading)


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