Do insider CEOs affect cost of debt? The moderating role of investor sentiment

Abstract

Purpose This study aims to examine how insider chief executive officer (CEO) appointments influence corporate borrowing costs and investigate whether investor sentiment moderates this relationship. Grounded in agency theory and information asymmetry perspectives, this study explores how capital market perceptions shape creditors’ risk assessments associated with insider leadership. Design/methodology/approach Using a sample of 2,121 firm-year observations from publicly listed firms over the period 2012–2020, this study uses ordinary least squares regression with industry and year fixed effects. A range of robustness and endogeneity controls are implemented, including propensity score matching, Heckman selection correction and entropy balancing, to ensure the validity of the empirical findings. Findings The results indicate that firms led by insider CEOs are associated with higher borrowing costs, suggesting that creditors may perceive insider appointments as increasing agency risks or governance concerns. Importantly, investor sentiment moderates this relationship: optimistic market conditions mitigate the perceived risk associated with insider CEOs, while pessimistic sentiment amplifies debt pricing penalties. These findings highlight the role of market-wide psychological factors in shaping credit risk evaluation. Research limitations/implications This study contributes to the literature on corporate governance, executive succession and debt contracting by demonstrating that investor sentiment serves as a contextual factor influencing how leadership characteristics are priced in credit markets. The findings offer insights applicable across different institutional environments where insider succession and capital market sentiment interact. Practical implications For boards and creditors, the results emphasize the importance of considering both executive background and prevailing market sentiment when evaluating leadership transitions and financing decisions. Regulators may also benefit from understanding how governance signals are interpreted by market participants. Originality/value This research extends prior studies by integrating behavioral finance perspectives into the governance–cost of debt nexus and by highlighting the moderating role of investor sentiment in shaping creditor responses to insider CEO appointments.