CEO Inside Debt and Costs of Bank Debt Financing

This study examines the role of CEOs’ pensions and deferred compensations by exploring their impacts on pricing and non-pricing contract terms of bank loans. CEO’s inside debt, defined as the sum of defined benefit pensions and deferred compensations, pays fixed amounts at periodic intervals. We find that higher inside debt holdings significantly reduce both loan rate spreads and demands for collateral. We also find that such effects are particularly pronounced under weak external governance proxied by strong anti-takeover defenses. Overall, our results support the idea that debt-like incentives for CEOs increase align the interests between managers and creditors.