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Agency Costs of Debt and Inside Debt: The Role of CEO Overconfidence

Galariotis, Emilios; Louca, Christodoulos; Petmezas, Dimitris; Wang, Shuhui

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Authors

Emilios Galariotis

Christodoulos Louca

Shuhui Wang



Abstract

This study extends our understanding of CEO inside debt compensation under an agency problem perspective by considering the impact of a behavioral trait, namely CEO overconfidence. Using a sample of US firms in Standard & Poor’s ExecuComp for the period 2006-2019, we find that overconfident CEOs exhibit greater inside debt incentives (i.e., incentives arising from definedbenefit pensions and deferred compensation). This relationship is more pronounced among firms with higher CEO overconfidence-induced agency costs of debt (e.g., financially unconstrained firms) managed by CEOs who are less able to align compensation with their own preferences (e.g., less powerful CEOs). The results are robust to endogeneity, self-selection concerns, and several alternative explanations. We contribute to the confluence of agency problem executive compensation under overconfident CEOs, and optimal contracting and managerial power theories.

Citation

Galariotis, E., Louca, C., Petmezas, D., & Wang, S. (2023). Agency Costs of Debt and Inside Debt: The Role of CEO Overconfidence. British Journal of Management, 34(3), 1606-1631. https://doi.org/10.1111/1467-8551.12661

Journal Article Type Article
Acceptance Date Aug 30, 2022
Online Publication Date Oct 9, 2022
Publication Date 2023-07
Deposit Date Sep 1, 2022
Publicly Available Date Jul 3, 2023
Journal British Journal of Management
Print ISSN 1045-3172
Electronic ISSN 1467-8551
Publisher Wiley
Peer Reviewed Peer Reviewed
Volume 34
Issue 3
Pages 1606-1631
DOI https://doi.org/10.1111/1467-8551.12661
Public URL https://durham-repository.worktribe.com/output/1196093

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Publisher Licence URL
http://creativecommons.org/licenses/by-nc-nd/4.0/

Copyright Statement
© 2022 The Authors. British Journal of Management published by John Wiley & Sons Ltd on behalf of British Academy of Management.

This is an open access article under the terms of the Creative Commons Attribution-NonCommercial-NoDerivs License, which permits use and distribution in any medium, provided the original work is properly cited, the use is non-commercial and no modifications or adaptations are made.







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