Scandinavian Working Papers in Economics

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 ()
Additional contact information
Henrik Cronqvist: Claremont McKenna College
Anil K. Makhija: The Ohio State University
Scott E. Yonker: The Ohio State University

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

JEL-codes: G32

54 pages, August 15, 2009

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