The role of CEO inside debt holdings in corporate pension funding status

Abstract

Purpose – The purpose of this study is to examine how pension risk shifting can be explained and constrained by debt component in chief executive officer (CEO) compensation and to explore whether a CEO’s relatively large holdings of inside debt to equity compensation would result in a well-funded pension status. Design/methodology/approach – The authors use two-stage least-squares model to control the potential unobserved and uncontrolled firm characteristics that could drive both CEO inside debt determinants and firm pension funding status. Findings – This paper finds a positive relationship between the CEO inside debt ratio and firm funding status. Additional tests show a positive association between the CEO inside debt ratio and financial slack measures and a negative association between this ratio and financial constraint measure. Additional evidence also shows that the CEO inside debt ratio is negatively associated with other contemporaneous investment activities. Overall, the findings suggest that CEO inside debt creates managerial incentives that can affect pension funding decisions and decrease pension risk shifting. Research limitations/implications – One of the difficulties facing the compensation literature is the unobservable nature of the entire compensation negotiation and design process. Pension funding status is another challenging topic given that management has discretion over the pension assumptions and the calculations themselves are complicated. Therefore, the determinants of pension status used in this paper are not all-inclusive. Although a two-stage least-squares methodology is applied to mitigate endogeneity, it is still possible that an omitted variable problem exists in both cases. Originality/value – This study provides direct evidence of the executive debt-like compensation’s effect on pension risk-shifting behavior and pension funding decisions and also contributes to the literature that investigates the association between CEO inside debt and firm risk by examining the trade-off between pension funding and other contemporaneous investment activities.

Impact of Board Composition on Pension De‐risking Strategies

“…Previous research on the relationship between corporate governance and corporate pension policy (Anantharaman and Lee, 2014; Guan and Tang, 2018; Phan and Hegde, 2013; Vafeas and Vlittis, 2016, 2018; Yu‐Thompson et al ., 2015) has been based on US data. Phan and Hegde (2013) find that firms with better internal and external corporate governance index tend to allocate more pension assets to equities.…”