Description:
<jats:title>Abstract</jats:title><jats:p>This paper provides a new explanation for investment‐cash flow sensitivity from the perspective of <jats:styled-content style="fixed-case">CEO</jats:styled-content> inside debt holdings. We examine the effect of <jats:styled-content style="fixed-case">CEO</jats:styled-content> pensions and deferred compensation (inside debt) on investment‐cash flow sensitivity for a sample of <jats:styled-content style="fixed-case">U</jats:styled-content>.<jats:styled-content style="fixed-case">S</jats:styled-content>. manufacturing firms from 2006 to 2012. We find that the firms with higher relative <jats:styled-content style="fixed-case">CEO</jats:styled-content> leverage ratios (<jats:styled-content style="fixed-case">CEO</jats:styled-content>'s debt/equity ratio scaled by the firm's debt/equity ratio) generate higher investment‐cash flow sensitivity. Moreover, one standard deviation increase in the logarithm of the relative <jats:styled-content style="fixed-case">CEO</jats:styled-content> leverage ratio enlarges investment‐cash flow sensitivity by 50 per cent. This positive relationship still holds even after we take account of endogeneity and financial constraints.</jats:p>