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

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

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