SIFR Research Report Series, Institute for Financial Research
No 67:
What Does CEOs’ Personal Leverage Tell Us About Corporate Leverage?
Henrik Cronqvist ()
, Anil K. Makhija ()
and Scott E. Yonker ()
Abstract: We find that firms behave remarkably similarly to how
their CEOs behave personally when it comes to leverage choices. We start
our analysis by compiling a comprehensive sample of home purchases and
financings among S&P 1,500 CEOs. Debt financing in a CEO’s most recent home
purchase is used as a revealed preference of the CEO’s personal attitude
towards debt. We find a robust positive relation between personal and
corporate leverage. We also find that firms tend to hire CEOs with a
similar personal attitude towards debt as the previous CEO. When the new
and previous CEOs have different personal preferences, corporate leverage
changes in the direction of the new CEO’s personal leverage. These results
support a model with endogenous matching of CEOs to firms. We also find
that the positive relation between CEOs’ personal leverage and corporate
leverage is stronger in firms with poor governance, suggesting that CEOs
imprint their personal preferences on the firms they manage when they are
able to do so. These results suggest that heterogeneity in CEOs’ personal
attitudes towards debt partly explains differences in corporate capital
structures, and suggest more generally that an analysis of CEOs’
personalities and personal traits may provide important information about
the financial policies of the firms they manage.
Keywords: Corporate leverage; personal leverage; CEO characteristics; (follow links to similar papers)
JEL-Codes: G32; (follow links to similar papers)
54 pages, August 15, 2009
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