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Capital Structure, CEO Dominance, and Corporate Performance

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  • Pornsit Jiraporn
  • Pandej Chintrakarn

    ()

  • Yixin Liu

Abstract

We use agency theory to investigate the influence of CEO dominance on variation in capital structure. Due to agency conflicts, managers may not always adopt leverage choices that maximize shareholders’ value. Consistent with the prediction of agency theory, the evidence reveals that, when the CEO plays a more dominant role among top executives, the firm adopts significantly lower leverage, probably to evade the disciplinary mechanisms associated with debt financing. Our results are important as they demonstrate that CEO power matters to critical corporate outcomes such as capital structure decisions. In addition, we find that the impact of changes in capital structure on firm performance is more negative for firms with more powerful CEOs. Overall, the results are in agreement with prior literature, suggesting that strong CEO dominance appears to exacerbate agency costs and is thus detrimental to firm value. Copyright Springer Science+Business Media, LLC 2012

Suggested Citation

  • Pornsit Jiraporn & Pandej Chintrakarn & Yixin Liu, 2012. "Capital Structure, CEO Dominance, and Corporate Performance," Journal of Financial Services Research, Springer;Western Finance Association, vol. 42(3), pages 139-158, December.
  • Handle: RePEc:kap:jfsres:v:42:y:2012:i:3:p:139-158 DOI: 10.1007/s10693-011-0109-8
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    References listed on IDEAS

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    Cited by:

    1. repec:eco:journ1:2017-04-59 is not listed on IDEAS
    2. Anwar Boumosleh & Brandon Cline, 2015. "Outside Director Stock Options and Dividend Policy," Journal of Financial Services Research, Springer;Western Finance Association, vol. 47(3), pages 381-410, June.
    3. Li, Tongxia & Munir, Qaiser & Abd Karim, Mohd Rahimie, 2017. "Nonlinear relationship between CEO power and capital structure: Evidence from China's listed SMEs," International Review of Economics & Finance, Elsevier, vol. 47(C), pages 1-21.
    4. repec:eee:ecofin:v:42:y:2017:i:c:p:487-503 is not listed on IDEAS
    5. repec:eee:reveco:v:51:y:2017:i:c:p:107-120 is not listed on IDEAS
    6. Woan-lih Liang & Konan Chan & Wei-Hsien Lai & Yanzhi Wang, 2013. "Motivation for Repurchases: A Life Cycle Explanation," Journal of Financial Services Research, Springer;Western Finance Association, vol. 43(2), pages 221-242, April.
    7. Onali, Enrico & Galiakhmetova, Ramilya & Molyneux, Philip & Torluccio, Giuseppe, 2016. "CEO power, government monitoring, and bank dividends," Journal of Financial Intermediation, Elsevier, vol. 27(C), pages 89-117.

    More about this item

    Keywords

    Capital structure; Agency costs; Leverage; CEO dominance; CEO power; G32; G34;

    JEL classification:

    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance

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