CEO Inside Debt and Financing Choice

Abstract

This paper examines the effects of CEO inside debt on firms financing behavior in the funding process. Consistent with prior literature suggesting the beneficial effect of CEO inside debt on the firms debt contracting environment, I find that firms with large CEO inside debt use more debt issuance and less cash holdings in funding the financing deficit caused by investments and payouts in excess of operating cash flows. I show the observed effects of CEO inside debt are more pronounced for financially constrained firms that have difficulty in accessing external capital markets. Overall, my evidence highlights the importance of incorporating the financing implications of inside debt in the optimal design of executive compensation contracts.