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Powerful CEOs and capital structure decisions: evidence from the CEO pay slice (CPS)

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  • Pandej Chintrakarn
  • Pornsit Jiraporn
  • Manohar Singh

Abstract

Motivated by agency theory, we explore how powerful CEOs view leverage. Because of the agency conflict, CEOs may adopt sub-optimal leverage levels that promote their own private benefits at the expense of shareholders. Using Bebchuk et al. (2011) CEO pay slice (CPS) to gauge CEO power, we find that powerful CEOs view leverage negatively and avoid high debt. However, CEOs appear to adopt sub-optimal leverage only when their power is sufficiently consolidated. Relatively weak CEOs do not seem to avoid leverage. The effect of CEO power on capital structure decisions is thus nonmonotonic. Our results imply that agency problems lead to self-serving behaviour only when managers command sufficient influence in the company. Finally, we also show that our conclusion is unlikely confounded by endogeneity.

Suggested Citation

  • Pandej Chintrakarn & Pornsit Jiraporn & Manohar Singh, 2014. "Powerful CEOs and capital structure decisions: evidence from the CEO pay slice (CPS)," Applied Economics Letters, Taylor & Francis Journals, vol. 21(8), pages 564-568, May.
    • Handle: RePEc:taf:apeclt:v:21:y:2014:i:8:p:564-568
    DOI: 10.1080/13504851.2013.875102
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    Cited by:

    1. Riaqa Mubeen & Dongping Han & Jaffar Abbas & Iftikhar Hussain, 2020. "The Effects of Market Competition, Capital Structure, and CEO Duality on Firm Performance: A Mediation Analysis by Incorporating the GMM Model Technique," Sustainability, MDPI, vol. 12(8), pages 1-18, April.
    2. Sheikh, Shahbaz, 2022. "CEO power and the likelihood of paying dividends: Effect of profitability and cash flow volatility," Journal of Corporate Finance, Elsevier, vol. 73(C).
    3. Qaiser Munir & Tongxia Li, 2018. "Nonlinearity between CEO power and firm leverage: evidence from the threshold model," Review of Managerial Science, Springer, vol. 12(3), pages 593-620, July.
    4. Zeitun, Rami & Goaied, Mohamed & Refai, Hisham Al, 2022. "Does minority management affect a firm's capital structure? Evidence from Japan," Finance Research Letters, Elsevier, vol. 50(C).
    5. Khawaja, Mohsin & Bhatti, M. Ishaq & Ashraf, Dawood, 2019. "Ownership and control in a double decision framework for raising capital," Emerging Markets Review, Elsevier, vol. 41(C).
    6. 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.
    7. Munir, Qaiser & Kok, Sook Ching & Teplova, Tamara & Li, Tongxia, 2017. "Powerful CEOs, debt financing, and leasing in Chinese SMEs: Evidence from threshold model," The North American Journal of Economics and Finance, Elsevier, vol. 42(C), pages 487-503.
    8. Chao, Chi Chur & Hu, May & Munir, Qaiser & Li, Tongxia, 2017. "The impact of CEO power on corporate capital structure: New evidence from dynamic panel threshold analysis," International Review of Economics & Finance, Elsevier, vol. 51(C), pages 107-120.
    9. Chintrakarn, Pandej & Jiraporn, Pornsit & Treepongkaruna, Sirimon, 2021. "How do independent directors view corporate social responsibility (CSR) during a stressful time? Evidence from the financial crisis," International Review of Economics & Finance, Elsevier, vol. 71(C), pages 143-160.
    10. Chen, Fu Chen & Indiran, Logaiswari Indiran & Abdul Kohar, Umar Haiyat Abdul Kohar, 2023. "Disruptive Innovation (DI) and Chief Executive Officer(CEO): A synthetic literature review," MPRA Paper 119321, University Library of Munich, Germany, revised 26 Oct 2023.

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