CEO Inside Debt and Insider Trading

We examine insider trading to test existing theory about how insiders perceive CEO pensions and deferred compensation (inside debt). Managerial compensation theory posits that debt-type compensation is an important component of optimal contracting because it reduces shareholder-debtholder agency costs, suggesting that shareholders may react positively to increases in CEO inside debt. Consistent with this conjecture, we document a positive association between CEO inside debt and net purchasing by well-informed insiders. We alleviate endogeneity concerns using 2SLS instrumental variables estimation. Further supporting theoretical predictions, we obtain stronger results when focusing on opportunistic trades, directors' and officers' trades, and financially distressed firms.