IDEAS home Printed from https://ideas.repec.org/a/eee/jfinec/v114y2014i1p125-154.html
   My bibliography  Save this article

Financial expert CEOs: CEO׳s work experience and firm׳s financial policies

Author

Listed:
  • Custódio, Cláudia
  • Metzger, Daniel

Abstract

We study CEOs with a career background in finance. Firms with financial expert CEOs hold less cash, more debt, and engage in more share repurchases. Financial expert CEOs are more financially sophisticated: they are less likely to use one companywide discount rate instead of a project-specific one, they manage financial policies more actively, and their firm investments are less sensitive to cash flows. Financial expert CEOs are able to raise external funds even when credit conditions are tight, and they were more responsive to the dividend and capital gains tax cuts in 2003. Analyzing CEO-firm matching based on financial experience, we find that financial expert CEOs tend to be hired by more mature firms. Our results are consistent with employment histories of CEOs being relevant for corporate policies. However, we cannot formally rule out that our findings are partly explained by endogenous CEO-firm matching.

Suggested Citation

  • Custódio, Cláudia & Metzger, Daniel, 2014. "Financial expert CEOs: CEO׳s work experience and firm׳s financial policies," Journal of Financial Economics, Elsevier, vol. 114(1), pages 125-154.
  • Handle: RePEc:eee:jfinec:v:114:y:2014:i:1:p:125-154
    DOI: 10.1016/j.jfineco.2014.06.002
    as

    Download full text from publisher

    File URL: http://www.sciencedirect.com/science/article/pii/S0304405X14001299
    Download Restriction: Full text for ScienceDirect subscribers only

    File URL: https://libkey.io/10.1016/j.jfineco.2014.06.002?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Eisfeldt, Andrea L. & Kuhnen, Camelia M., 2013. "CEO turnover in a competitive assignment framework," Journal of Financial Economics, Elsevier, vol. 109(2), pages 351-372.
    2. Hovakimian, Armen & Opler, Tim & Titman, Sheridan, 2001. "The Debt-Equity Choice," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 36(1), pages 1-24, March.
    3. Eugene F. Fama & Kenneth R. French, 2001. "Disappearing Dividends: Changing Firm Characteristics Or Lower Propensity To Pay?," Journal of Applied Corporate Finance, Morgan Stanley, vol. 14(1), pages 67-79, March.
    4. Dittmann, I. & Maug, E. & Schneider, Christoph, 2010. "Bankers on boards of German firms : What they do, what they are worth, and why they are (still) there," Other publications TiSEM 610cf1b5-ae96-4112-9ff3-9, Tilburg University, School of Economics and Management.
    5. Massimo Massa & Andrei Simonov, 2006. "Hedging, Familiarity and Portfolio Choice," Review of Financial Studies, Society for Financial Studies, vol. 19(2), pages 633-685.
    6. Dirk Jenter & Katharina Lewellen, 2015. "CEO Preferences and Acquisitions," Journal of Finance, American Finance Association, vol. 70(6), pages 2813-2852, December.
    7. Philippe Aghion & John Van Reenen & Luigi Zingales, 2013. "Innovation and Institutional Ownership," American Economic Review, American Economic Association, vol. 103(1), pages 277-304, February.
    8. John Graham & Campbell Harvey, 2002. "HOW DO CFOs MAKE CAPITAL BUDGETING AND CAPITAL STRUCTURE DECISIONS?," Journal of Applied Corporate Finance, Morgan Stanley, vol. 15(1), pages 8-23, March.
    9. Oyer, Paul & Schaefer, Scott, 2011. "Personnel Economics: Hiring and Incentives," Handbook of Labor Economics, in: O. Ashenfelter & D. Card (ed.), Handbook of Labor Economics, edition 1, volume 4, chapter 20, pages 1769-1823, Elsevier.
    10. Xavier Gabaix & Augustin Landier, 2008. "Why has CEO Pay Increased So Much?," The Quarterly Journal of Economics, Oxford University Press, vol. 123(1), pages 49-100.
    11. Malmendier, Ulrike & Tate, Geoffrey, 2008. "Who makes acquisitions? CEO overconfidence and the market's reaction," Journal of Financial Economics, Elsevier, vol. 89(1), pages 20-43, July.
    12. Bronwyn H. Hall & Adam B. Jaffe & Manuel Trajtenberg, 2001. "The NBER Patent Citation Data File: Lessons, Insights and Methodological Tools," NBER Working Papers 8498, National Bureau of Economic Research, Inc.
    13. Cronqvist, Henrik & Makhija, Anil K. & Yonker, Scott E., 2012. "Behavioral consistency in corporate finance: CEO personal and corporate leverage," Journal of Financial Economics, Elsevier, vol. 103(1), pages 20-40.
    14. Mueller, Dennis C, 1972. "A Life Cycle Theory of the Firm," Journal of Industrial Economics, Wiley Blackwell, vol. 20(3), pages 199-219, July.
    15. Ulrike Malmendier & Geoffrey Tate, 2005. "CEO Overconfidence and Corporate Investment," Journal of Finance, American Finance Association, vol. 60(6), pages 2661-2700, December.
    16. Cerqueiro, Geraldo & Degryse, Hans & Ongena, Steven, 2011. "Rules versus discretion in loan rate setting," Journal of Financial Intermediation, Elsevier, vol. 20(4), pages 503-529, October.
    17. Thomas W. Bates & Kathleen M. Kahle & René M. Stulz, 2009. "Why Do U.S. Firms Hold So Much More Cash than They Used To?," Journal of Finance, American Finance Association, vol. 64(5), pages 1985-2021, October.
    18. Raj Chetty & Emmanuel Saez, 2005. "Dividend Taxes and Corporate Behavior: Evidence from the 2003 Dividend Tax Cut," The Quarterly Journal of Economics, Oxford University Press, vol. 120(3), pages 791-833.
    19. Jeffrey R. Brown & Nellie Liang & Scott Weisbenner, 2007. "Executive Financial Incentives and Payout Policy: Firm Responses to the 2003 Dividend Tax Cut," Journal of Finance, American Finance Association, vol. 62(4), pages 1935-1965, August.
    20. Marko Tervio, 2008. "The Difference That CEOs Make: An Assignment Model Approach," American Economic Review, American Economic Association, vol. 98(3), pages 642-668, June.
    21. Bronwyn H. Hall & Adam Jaffe & Manuel Trajtenberg, 2005. "Market Value and Patent Citations," RAND Journal of Economics, The RAND Corporation, vol. 36(1), pages 16-38, Spring.
    22. Philipp Krüger & Augustin Landier & David Thesmar, 2015. "The WACC Fallacy: The Real Effects of Using a Unique Discount Rate," Journal of Finance, American Finance Association, vol. 70(3), pages 1253-1285, June.
    23. Cerqueiro, Geraldo & Degryse, Hans & Ongena, Steven, 2011. "Rules versus discretion in loan rate setting," Journal of Financial Intermediation, Elsevier, vol. 20(4), pages 503-529, October.
    24. David Hirshleifer & Angie Low & Siew Hong Teoh, 2012. "Are Overconfident CEOs Better Innovators?," Journal of Finance, American Finance Association, vol. 67(4), pages 1457-1498, August.
    25. Berger, Allen N. & Miller, Nathan H. & Petersen, Mitchell A. & Rajan, Raghuram G. & Stein, Jeremy C., 2005. "Does function follow organizational form? Evidence from the lending practices of large and small banks," Journal of Financial Economics, Elsevier, vol. 76(2), pages 237-269, May.
    26. Mark Grinblatt & Matti Keloharju, 2001. "How Distance, Language, and Culture Influence Stockholdings and Trades," Journal of Finance, American Finance Association, vol. 56(3), pages 1053-1073, June.
    27. DeAngelo, Harry & DeAngelo, Linda & Stulz, Rene M., 2006. "Dividend policy and the earned/contributed capital mix: a test of the life-cycle theory," Journal of Financial Economics, Elsevier, vol. 81(2), pages 227-254, August.
    28. Opler, Tim & Pinkowitz, Lee & Stulz, Rene & Williamson, Rohan, 1999. "The determinants and implications of corporate cash holdings," Journal of Financial Economics, Elsevier, vol. 52(1), pages 3-46, April.
    29. Marianne Bertrand & Antoinette Schoar, 2003. "Managing with Style: The Effect of Managers on Firm Policies," The Quarterly Journal of Economics, Oxford University Press, vol. 118(4), pages 1169-1208.
    30. C. Edward Fee & Charles J. Hadlock & Joshua R. Pierce, 2013. "Managers with and without Style: Evidence Using Exogenous Variation," Review of Financial Studies, Society for Financial Studies, vol. 26(3), pages 567-601.
    31. Antoinette Schoar & Luo Zuo, 2011. "Shaped by Booms and Busts: How the Economy Impacts CEO Careers and Management Styles," NBER Working Papers 17590, National Bureau of Economic Research, Inc.
    32. Alberto Abadie & David Drukker & Jane Leber Herr & Guido W. Imbens, 2004. "Implementing matching estimators for average treatment effects in Stata," Stata Journal, StataCorp LP, vol. 4(3), pages 290-311, September.
    33. Heitor Almeida & Murillo Campello & Michael S. Weisbach, 2004. "The Cash Flow Sensitivity of Cash," Journal of Finance, American Finance Association, vol. 59(4), pages 1777-1804, August.
    34. Jeremy C. Stein, 2002. "Information Production and Capital Allocation: Decentralized versus Hierarchical Firms," Journal of Finance, American Finance Association, vol. 57(5), pages 1891-1921, October.
    35. Graham, John R. & Harvey, Campbell R. & Puri, Manju, 2013. "Managerial attitudes and corporate actions," Journal of Financial Economics, Elsevier, vol. 109(1), pages 103-121.
    36. Philipp Krüger & Augustin Landier & David Thesmar, 2015. "The WACC Fallacy: The Real Effects of Using a Unique Discount Rate," Journal of Finance, American Finance Association, vol. 70(3), pages 1253-1285, 06.
    37. Burak Güner, A. & Malmendier, Ulrike & Tate, Geoffrey, 2008. "Financial expertise of directors," Journal of Financial Economics, Elsevier, vol. 88(2), pages 323-354, May.
    38. Michael L. Lemmon & Michael R. Roberts & Jaime F. Zender, 2008. "Back to the Beginning: Persistence and the Cross‐Section of Corporate Capital Structure," Journal of Finance, American Finance Association, vol. 63(4), pages 1575-1608, August.
    39. Graham, John R. & Harvey, Campbell R., 2001. "The theory and practice of corporate finance: evidence from the field," Journal of Financial Economics, Elsevier, vol. 60(2-3), pages 187-243, May.
    40. Renée B. Adams & Heitor Almeida & Daniel Ferreira, 2005. "Powerful CEOs and Their Impact on Corporate Performance," Review of Financial Studies, Society for Financial Studies, vol. 18(4), pages 1403-1432.
    41. Graham, John R. & Harvey, Campbell R. & Puri, Manju, 2015. "Capital allocation and delegation of decision-making authority within firms," Journal of Financial Economics, Elsevier, vol. 115(3), pages 449-470.
    42. Lins, Karl V. & Servaes, Henri & Tufano, Peter, 2010. "What drives corporate liquidity? An international survey of cash holdings and lines of credit," Journal of Financial Economics, Elsevier, vol. 98(1), pages 160-176, October.
    43. Ingolf Dittmann & Ernst Maug & Christoph Schneider, 2010. "Bankers on the Boards of German Firms: What They Do, What They Are Worth, and Why They Are (Still) There," Review of Finance, European Finance Association, vol. 14(1), pages 35-71.
    44. Cerqueiro, Geraldo & Degryse, Hans & Ongena, Steven, 2011. "Rules versus discretion in loan rate setting," Journal of Financial Intermediation, Elsevier, vol. 20(4), pages 503-529, October.
    45. Antonio Falato & Dan Li & Todd T. Milbourn, 2012. "CEO pay and the market for CEOs," Finance and Economics Discussion Series 2012-39, Board of Governors of the Federal Reserve System (U.S.).
    46. Sudheer Chava & Michael R. Roberts, 2008. "How Does Financing Impact Investment? The Role of Debt Covenants," Journal of Finance, American Finance Association, vol. 63(5), pages 2085-2121, October.
    47. Korajczyk, Robert A. & Levy, Amnon, 2003. "Capital structure choice: macroeconomic conditions and financial constraints," Journal of Financial Economics, Elsevier, vol. 68(1), pages 75-109, April.
    48. Ulrike Malmendier & Geoffrey Tate & Jon Yan, 2011. "Overconfidence and Early‐Life Experiences: The Effect of Managerial Traits on Corporate Financial Policies," Journal of Finance, American Finance Association, vol. 66(5), pages 1687-1733, October.
    49. Cláudia Custódio & Daniel Metzger, 2013. "How Do CEOs Matter? The Effect of Industry Expertise on Acquisition Returns," Review of Financial Studies, Society for Financial Studies, vol. 26(8), pages 2008-2047.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Deshmukh, Sanjay & Goel, Anand M. & Howe, Keith M., 2021. "Do CEO beliefs affect corporate cash holdings?," Journal of Corporate Finance, Elsevier, vol. 67(C).
    2. Adams, Renée & Keloharju, Matti & Knüpfer, Samuli, 2018. "Are CEOs born leaders? Lessons from traits of a million individuals," Journal of Financial Economics, Elsevier, vol. 130(2), pages 392-408.
    3. Florackis, Chris & Sainani, Sushil, 2018. "How do chief financial officers influence corporate cash policies?," Journal of Corporate Finance, Elsevier, vol. 52(C), pages 168-191.
    4. Claudia Custodio & Diogo Mendes & Daniel Metzger, 2021. "The impact of financial education of executives on financial practices of medium and large enterprises," NOVAFRICA Working Paper Series wp2105, Universidade Nova de Lisboa, Nova School of Business and Economics, NOVAFRICA.
    5. Duong, Kiet Tuan & Banti, Chiara & Instefjord, Norvald, 2021. "Managerial conservatism and corporate policies," Journal of Corporate Finance, Elsevier, vol. 68(C).
    6. Marius Guenzel & Ulrike Malmendier, 2020. "Behavioral Corporate Finance: The Life Cycle of a CEO Career," NBER Working Papers 27635, National Bureau of Economic Research, Inc.
    7. King, Timothy & Srivastav, Abhishek & Williams, Jonathan, 2016. "What's in an education? Implications of CEO education for bank performance," Journal of Corporate Finance, Elsevier, vol. 37(C), pages 287-308.
    8. Enkhtaivan, Bolortuya & Davaadorj, Zagdbazar, 2021. "Do they recall their past? CEOs’ liquidity policies across firms as they switch jobs," Journal of Behavioral and Experimental Finance, Elsevier, vol. 29(C).
    9. Berger, Allen N. & Kick, Thomas & Schaeck, Klaus, 2014. "Executive board composition and bank risk taking," Journal of Corporate Finance, Elsevier, vol. 28(C), pages 48-65.
    10. Vincent J. Intintoli & Kathleen M. Kahle, 2016. "Cash Holdings and CEO Turnover," Quarterly Journal of Finance (QJF), World Scientific Publishing Co. Pte. Ltd., vol. 6(04), pages 1-39, December.
    11. Hu, Conghui & Liu, Yu-Jane, 2015. "Valuing diversity: CEOs' career experiences and corporate investment," Journal of Corporate Finance, Elsevier, vol. 30(C), pages 11-31.
    12. Sunder, Jayanthi & Sunder, Shyam V. & Zhang, Jingjing, 2017. "Pilot CEOs and corporate innovation," Journal of Financial Economics, Elsevier, vol. 123(1), pages 209-224.
    13. Lartey, Theophilus & Danso, Albert & Owusu-Agyei, Samuel, 2020. "CEOs' market sentiment and corporate innovation: The role of financial uncertainty, competition and capital intensity," International Review of Financial Analysis, Elsevier, vol. 72(C).
    14. Sah, Nilesh B., 2021. "Cash is Queen: Female CEOs’ propensity to hoard cash," Journal of Behavioral and Experimental Finance, Elsevier, vol. 29(C).
    15. Antoinette Schoar & Kelvin Yeung & Luo Zuo, 2020. "The Effect of Managers on Systematic Risk," NBER Working Papers 27487, National Bureau of Economic Research, Inc.
    16. David Hirshleifer & Angie Low & Siew Hong Teoh, 2012. "Are Overconfident CEOs Better Innovators?," Journal of Finance, American Finance Association, vol. 67(4), pages 1457-1498, August.
    17. Giau Bui, Dien & Chen, Yehning & Lin, Chih-Yung & Lin, Tse-Chun, 2021. "Risk-taking of bank CEOs and corporate innovation," Journal of International Money and Finance, Elsevier, vol. 115(C).
    18. Danso, Albert & Lartey, Theophilus & Amankwah-Amoah, Joseph & Adomako, Samuel & Lu, Qinye & Uddin, Moshfique, 2019. "Market sentiment and firm investment decision-making," International Review of Financial Analysis, Elsevier, vol. 66(C).
    19. Entrop, Oliver & Merkel, Matthias F., 2018. "Managers' research education, the use of FX derivatives and corporate speculation," Passauer Diskussionspapiere, Betriebswirtschaftliche Reihe B-32-18, University of Passau, Faculty of Business and Economics.
    20. Ulrike Malmendier, 2018. "Behavioral Corporate Finance," NBER Working Papers 25162, National Bureau of Economic Research, Inc.

    More about this item

    Keywords

    CEO employment history; CEOs characteristics; Financial expertise; Cash holdings; Capital structure; CEO-firm matching;
    All these keywords.

    JEL classification:

    • G30 - Financial Economics - - Corporate Finance and Governance - - - General
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • J24 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Human Capital; Skills; Occupational Choice; Labor Productivity

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eee:jfinec:v:114:y:2014:i:1:p:125-154. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: . General contact details of provider: http://www.elsevier.com/locate/inca/505576 .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Catherine Liu (email available below). General contact details of provider: http://www.elsevier.com/locate/inca/505576 .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.