Date of Award

Summer 2013

Document Type

Dissertation

Degree Name

Doctor of Business Administration (DBA)

Department

Business Administration

First Advisor

Otis Gilley

Abstract

In the first chapter, I examine the effect CEO inside debt holdings on firm cash holdings, as measured by the ratio of cash and marketable securities to net assets using a sample of EXECUCOMP firms over the period of 2006 to 2008. Following prior literature on CEO inside debt holdings (Cassell et al., 2012), I use the following two measures as proxies for CEO inside debt compensation: (1) the CEO to firm debt/equity ratio, which is calculated as the CEO's debt/equity ratio scaled by the firm's debt to equity ratio and 2) an indicator variable equal to one when the CEO to firm debt/ equity ratio is greater than one. Higher CEO inside debt compensation alleviates agency conflicts between managers and debt holders by aligning mangers with debt holders. CEOs with higher inside debt may prefer to invest in cash as cash holdings are less risky projects (Tong, 2010). Consequently, based on risk-aversion hypothesis, I posit a positive relation between CEO inside debt holdings and corporate cash holdings. I find a significant and positive relation between CEO inside debt holdings and firm cash holdings. I find that the positive relation between CEO inside debt compensation and firm cash holdings remain significant even after controlling for the effect of CEO equity-based incentives on firm cash holdings. I also find that the positive relation between CEO inside debt holdings and firm cash holdings is mitigated by the financial constraint status of the firm based on the notion that CEOs of a financially constrained firms may face difficulty accumulating excess cash as their inside debt compensation goes up since capital is limited. I adopt instrumental variable approach to explicitly address the endogeneity problem as CEO compensation is endogenously determined by firm and CEO characteristics. My main findings still hold after endogeneity bias corrections and findings are robust to alternative specifications. Utilizing a modified version of the Fama and French (1998) valuation regression, I find that cash increases have a more positive valuation effect for firms with low levels of CEO inside debt relative to those with high levels of CEO inside debt.

In the second chapter I investigate the effect of CEO inside debt compensation on post-merger firm risk using acquiring firm risk changes over the period of 2007 to 2009. 1 utilize four alternative measures to proxy for post-merger firm risk: the change in pre and post-merger distance-to-default risk calculated by a naïve alternative of the Merton distance-to-default model developed by Bharath and Shumway, 2008; the change in pre and post-merger default risk as calculated by the Altman bankruptcy prediction model (Altman, 1968); change in total firm risk measured as post-merger minus pre-merger stock return standard deviation in percentage; and change in idiosyncratic risk measured as post-merger minus pre-merger standard deviation of return residuals in percentage estimated by the single factor market model. Following prior literature on CEO inside debt holdings (Cassell et al., 2012), I use the CEO to firm debt/equity ratio and CEO to firm debt/equity ratio> 1 , a dummy variable that equals to one when the CEO to firm debt/equity ratio is greater than one, to proxy for CEO inside debt compensation. Prior literature on CEO inside debt finds that CEO inside debt compensation motivates CEOs to engage in less risky investment and financial decisions. For example, Cassell, Huang, Sanchez, and Stuart (2012) find that higher levels of CEO inside debt are associated with less risky investment and financial policies. Based on empirical findings of prior literature, I conjecture a negative relation between CEO inside debt holdings and post-merger firm risk. I find a significant negative relation between post-merger firm risk, as measured by change in total firm risk, measured as post-merger minus pre-merger stock return standard deviation in percentage, and change in idiosyncratic risk, measured as post-merger minus pre-merger standard deviation of return residuals in percentage estimated by the single factor market model and CEO inside debt holdings as measured by the CEO to firm debt/equity ratio. I adopt instrumental variable approach to address the endogeneity problem as CEO compensation is endogenously determined by firm and CEO characteristics. My main findings still hold after endogeneity bias corrections. (Abstract shortened by UMI.)

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