CEO Inside Debt and Asymmetric Cost Behavior

We examine the impact of CEO inside debt on SG&A cost asymmetry using a broad sample of S&P 1500 nonfinancial U. S. firms. Theory and prior empirical findings suggest that CEOs with large inside debt holdings manage their firms conservatively and adopt less risky corporate decisions. This study investigates the impact of CEO inside debt on cost decisions. The core concept of cost asymmetry literature is the future value of slack resources when sales decrease: slack resources can avoid adjustment costs when sales rebound. However, slack resources are still a part of risky investment because the management future prediction cannot be perfectly precise. Therefore, we predict that firms managed by CEOs who have high CEO inside debt exhibit lower degree of cost asymmetry. Consistent with our conjecture, we find that CEO inside debt is negatively associated with SG&A cost asymmetry. Further, we find that the negative association is more pronounced among firms with higher risk, suggesting that CEO inside debt provides managers with incentives in correspondence to the firm’s business condition. Additional evidence shows that the negative relation between CEO inside debt and cost asymmetry is more pronounced when the CEO is older and when the CEO is an outsider. Overall, this study contributes to the literature by providing evidence that CEO inside debt influences managers’resource adjustment decisions.