Executive stock ownership, debt choice, and the moderating effect of institutional owners

Abstract

This paper examines how executive stock ownership influences the choice of debt structure, investigating whether institutional owners moderate the relationship between the level of executive ownership and the decision to use public versus private debt. Our findings suggest that firms with higher levels of executive ownership tend to employ significantly more public debt financing to potentially reduce the monitoring intensity of their managerial decisions. However, we also find that oversight by motivated and longer-horizon institutional investors prevents firms from avoiding the more stringent monitoring associated with privately held debt. Further tests indicate that the link between CEO and executive ownership levels and the preference for public debt is more pronounced in smaller firms, which typically experience higher levels of information asymmetry. Our findings align with the monitoring avoidance hypothesis and the informational asymmetry hypothesis.