CEOs vs. CFOs: Incentives and Corporate Policies

Abstract:     
We undertake a broad-based study of the effect of managerial risk-taking incentives on corporate financial policies and show that CEOs' and CFOs' risk-taking incentives 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.

Keywords: Capital Structure, Cash, Debt Maturity, Accrual, Incentives

JEL Classifications: G30, G32

Working Paper Series