Author(s): Kyoungwon Mo, Kyung Jin Park, YoungJin Kim
Using CEO pension as inside debt, we show how inside debt affects cost stickiness. Inside debt was recently recognized as debt-based compensation that increases managers’ risk aversion. More risk adverse managers will reduce cost stickiness if it suits their self-interest. We empirically find that inside debt decreases cost stickiness, which implies that cost stickiness is mainly driven by overconfident CEOs’ intentions to benefit them. Our results show that inside debt can mitigate the agency problem in cost stickiness.