CEO stock ownership and firm default risk

Abstract

Purpose This study examines the effect of chief executive officer (CEO) stock ownership on firm default risk. While equity-based incentives are expected to align managerial and shareholder interests and enhance firm survival, alternative mechanisms – such as CEO under-diversification, entrenchment, and risk-shifting incentives – may instead increase default risk. Drawing on agency theory, behavioral agency theory, and approach/inhibition theory, the study evaluates whether higher CEO stock ownership leads to more conservative or riskier corporate outcomes. Design/methodology/approach The analysis is conducted on a panel of Standard & Poor's 500 (S&P 500) firms over the period 2006–2021. Firm default risk is measured using credit ratings and credit default swap spreads. The empirical strategy employs several econometric techniques, including ordered probit models, multivariate panel regressions, logit-based specifications, and propensity score matching, to address potential endogeneity and test the robustness of the results. Findings The results show that higher CEO stock ownership is positively associated with firm default risk. This relationship is robust across alternative risk measures and econometric specifications. Additional analyses reveal that the association is stronger among highly levered and financially weaker firms, suggesting that ownership incentives may amplify risk-taking when firms are more exposed to financial distress. Originality/value This study contributes to the literature on executive incentives and corporate risk by providing evidence that CEO stock ownership may increase firm default risk rather than mitigate it. By integrating agency theory, behavioral agency theory, and approach/inhibition theory, the paper highlights the role of managerial risk preferences and cognitive biases in shaping corporate risk-taking. The findings provide important implications for corporate governance and executive compensation design.