Inside debt and corporate financing decisions

We find that the negative association between firm leverage and inside debt documented by prior research is driven by a mechanical association between these two variables. To circumvent this problem, we focus on the firm’s marginal financing decisions. We show that firms with higher CEO inside debt tend to issue more (retire less) debt when facing financing deficits (surpluses). This tendency is pronounced only when the firm is under-leveraged, but not when it is over-leveraged, suggesting that CEO inside debt allows firms to take advantage of the lower cost of financing, but does not lead to excessive debt.