Senior Management Tenure and the Choice of External Financing Mode

Casual empiricism points to the relative reluctance of senior management of Italian companies to raise equity financing for fear of dilution and relinquishing effective control. Our econometric analysis based on panel data for a sample of listed companies demonstrates that investment outlays of analyzed companies are strongly associated with debt rather than equity issuances. In turn, the size and likelihood of equity issuances are negatively associated with the tenure of both CEOs and supervisory board members. After controlling for firm-level fundamentals and time effects, we find that firms with the highest average tenure of senior management exhibit a relative preference for debt financing over equity except for periods, when a company records negative operating cash flows. Generally, firms with higher average tenure of CEOs and supervisory boards implement more conservative financial management strategies preferring to accumulate cash reserves in good times and slashing them or recuring to debt financing when facing operational difficulties. Importantly, the average age of officers is found to exhibit no similar link with the choice of external financing mode. The observed choices of the modes of external financing may be conducive to slowing the growth of Italian companies, reducing the career mobility of officers, creating entrenched boards, and increasing the average level of indebtedness of the corporate sector.