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CEOs versus CFOs: Incentives and corporate policies

  • Chava, Sudheer
  • Purnanandam, Amiyatosh

We undertake a broad-based study of the effect of managerial risk-taking incentives on corporate financial policies and show that the risk-taking incentives of chief executive officers (CEOs) and chief financial officers (CFOs) significantly influence their firms' financial policies. In particular, we find that CEOs' risk-decreasing (-increasing) incentives are associated with lower (higher) leverage and higher (lower) cash balances. CFOs' risk-decreasing (-increasing) incentives are associated with safer (riskier) debt-maturity choices and higher (lower) earnings-smoothing through accounting accruals. We exploit the stock option expensing regulation of 2004 to establish a causal link between managerial incentives and corporate policies. Our findings have important implications for optimal corporate compensation design.

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Article provided by Elsevier in its journal Journal of Financial Economics.

Volume (Year): 97 (2010)
Issue (Month): 2 (August)
Pages: 263-278

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Handle: RePEc:eee:jfinec:v:97:y:2010:i:2:p:263-278
Contact details of provider: Web page: http://www.elsevier.com/locate/inca/505576

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