CEO inside debt and downside risk: Evidence from internal and external environments

In this study, we investigate whether inside debt held by CEOs is associated with downside risk and also consider the impact of internal (CEOs' and firms' characteristics) and external (industry competition and macroeconomic uncertainty) factors on the connection to CEO inside debt, which is debt-like compensation and corporate downside risk. We find that CEOs who hold more inside debt reduce downside risk. However, the negative impact of inside debt holdings on downside risk is offset in firms managed by younger or male CEOs, whereas the ability of inside debt held by a CEO to decrease corporate downside risk is amplified in firms operated by overconfident CEOs. Moreover, this reduction effect occurs in firms of good quality (higher earnings, smaller size, lower leverage, higher cash surplus, higher excess returns, and higher profitability). Finally, we find that this effect is more pronounced for firms operating in a low-competition industry, facing low economic policy uncertainty, and low equity market volatility.