CEO inside debt and internal capital market efficiency |
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| Affiliation: | 1. Otto-von-Guericke University Magdeburg, Germany;2. Halle Institute for Economic Research (IWH), Germany;3. Goethe University Frankfurt and Research Center SAFE, Germany;4. Utrecht University School of Economics, Netherlands;1. Pamplin College of Business, Virginia Tech, United States;2. College of Business Administration, University of Nebraska-Lincoln, United States;3. College of Business, Colorado State University, United States;1. Mississippi State University, Department of Finance and Economics, P.O. Box 9580, Mississippi State, MS 39762, United States;2. Northern Illinois University, Department of Finance, DeKalb, IL 60115, United States |
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| Abstract: | Agency theory argues that managerial equity-based incentives are more effective when firm solvency is likely while debt-based incentives are more effective when firms face a greater likelihood of bankruptcy. We examine the relation between chief executive officers' (CEOs') inside debt holdings and the internal capital market allocation of multi-segment firms. We find that CEO inside debt holdings are associated with conservative capital allocation to firm segments, with the result driven by financially distressed firms. Further analysis indicates that although CEO inside debt, on average, is negatively related to firm value, the relation is positive for financially distressed firms. Our evidence indicates that inside debt holdings align the interests of managers and external creditors, inducing managers to pursue conservative capital allocation strategies that appear to be optimal for firms facing insolvency. |
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