Business, Management and Accounting
8 years ago

CEO's inside debt hinders firm leverage, impacting shareholder interests.

Financial Management
CEO's Inside Debt and Dynamics of Capital Structure
Eric R. Brisker, Wei Wang

Paper Summary

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Debt-type compensation for CEOs affects how much debt a company uses. If a CEO is very cautious, they might use less debt than shareholders want. When a company has too much debt, a cautious CEO will pay it off quickly. But when a company doesn't have enough debt, they might be hesitant to borrow more. The study found that when a CEO's inside debt ratio is higher, the company has less debt and adjusts its debt levels faster to match what shareholders want. The best ratio for balancing a company's debt is around 10% of the firm's total debt.