Behavioral Consistency in Corporate Finance: CEO Personal and Corporate Leverage

51 Pages Posted: 24 Apr 2009 Last revised: 19 Nov 2015

Henrik Cronqvist

University of Miami - Department of Finance

Anil K. Makhija

Ohio State University (OSU) - Department of Finance

Scott E. Yonker

Cornell University - Dyson School of Applied Economics and Management

Date Written: March 11, 2011

Abstract

We find that firms behave consistently with how their CEOs behave personally in the context of leverage choices. Analyzing data on CEOs' leverage in their most recent primary home purchases, we find a positive, economically relevant, robust relation between corporate and personal leverage in the cross-section and when examining CEO turnovers. The results are consistent with an endogenous matching of CEOs to firms based on preferences, as well as with CEOs imprinting their personal preferences on the firms they manage, particularly when governance is weaker. Besides enhancing our understanding of the determinants of corporate capital structures, the broader contribution of the paper is to show that CEOs' personal behavior can, in part, explain corporate financial behavior of the firms they manage.

Keywords: Corporate finance, behavioral consistency theory, CEO personal leverage, corporate leverage

JEL Classification: G32; G34

Suggested Citation

Cronqvist, Henrik and Makhija, Anil K. and Yonker, Scott E., Behavioral Consistency in Corporate Finance: CEO Personal and Corporate Leverage (March 11, 2011). Robert Day School of Economics and Finance Research Paper No. 2009-05; Fisher College of Business Working Paper No. 2009-03-04; Charles A. Dice Center Working Paper No. 2009-4 . Available at SSRN: https://ssrn.com/abstract=1392836 or http://dx.doi.org/10.2139/ssrn.1392836

Henrik Cronqvist

University of Miami - Department of Finance ( email )

P.O. Box 248094
Coral Gables, FL 33124-6552
United States
(305) 515-5898 (Phone)

HOME PAGE: http://sites.google.com/site/henrikcronqvist/

Anil K. Makhija (Contact Author)

Ohio State University (OSU) - Department of Finance ( email )

2100 Neil Avenue
Columbus, OH 43210-1144
United States
614-292-1899 (Phone)

Scott E. Yonker

Cornell University - Dyson School of Applied Economics and Management ( email )

Ithaca, NY
United States

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