Board Independence and Adjustment Speed of CEO Inside Debt

Abstract

We find that firms with more independent directors adjust CEO inside debt towards an optimum more quickly. This effect is more pronounced in financially unconstrained, growth, and under-levered firms, and also firms led by more powerful or overconfident CEOs. We find that when the agency cost of CEO inside debt is low, board independence is associated with a slower adjustment speed. The ability of corporate boards to design CEO compensation contracts in the shareholders' best interest has come under intense scrutiny. Our evidence suggests that independent directors make intricate trade-off decisions when adjusting them in ways consistent with the optimal-contracting perspective.