CEO Inside Debt Incentives and Corporate Tax Sheltering

CEO Inside Debt and Accounting Conservatism

“…Phan () investigates CEO inside debt in the M&A setting and finds evidence consistent with the agency theory's prediction of a negative relation between CEO inside debt holdings and corporate risk taking. Chi et al () show that CEOs with large inside debt holdings are less aggressive in tax planning. Taken together, these studies provide evidence in support of the argument that inside debt can reduce the agency costs of debt and mitigate managers’ incentives to pursue risk‐taking strategies.…”

“…Economic theory suggests that inside debt can align the interests of managers with debtholders and reduce their incentives to expropriate debtholders through asset substitution (Jensen and Meckling ; Edmans and Liu ). Recent studies have linked it empirically to a number of corporate policies and outcomes (Sundaram and Yermack ; Cassell et al ; Wei and Yermack ; Anantharaman et al ; Phan ; Chi et al ). However, little is known about whether inside debt affects firms’ accounting choices.…”

“…First, we add to the literature on executive compensation by demonstrating the impact of debt‐like compensation on corporate financial reporting policies. Existing studies have found that inside debt affects firms’ default probability (Sundaram and Yermack ), risk‐taking activities (Cassell et al ), bond prices (Wei and Yermack ), bank loan contracting (Anantharaman et al ), M&A decisions (Phan ), and tax avoidance activities (Chi et al ). We expand this stream of research by showing that CEO inside debt affects firms’ financial reporting practices in terms of accounting conservatism.…”