The Effect of Corporate Culture on Capital Structure Policy

71 Pages Posted: 18 Mar 2010

See all articles by Cathy Xuying Cao

Cathy Xuying Cao

University of Texas at Dallas - Department of Finance

David C. Mauer

University of North Carolina (UNC) at Charlotte

Date Written: March 15, 2010

Abstract

We empirically investigate the effect of corporate culture on capital structure policy. This paper uses CEO replacement to identify change in corporate culture. We focus on firms that change their debt policy from zero leverage to positive leverage or from positive leverage to zero leverage at least once during their history. We find that the cultural change brought by new CEOs has a significant impact on the continuity of the firm’s existing debt policy. Evidence shows that firms with recent CEO replacement tend to switch their debt policy. Moreover, the magnitude and significance of the association between CEO turnovers and the subsequent debt policy changes are much stronger for cases with external CEO replacement. This documented cultural effect is not driven by firm fundamentals, endogeneity of CEO turnover, strength of corporate governance, merger and acquisition activities, or marginal tax benefits, and is not driven by the subset of firms with multiple policy changes. Furthermore, firms that never change their debt policy over their history have significantly fewer CEO turnovers than firms with policy changes, consistent with new CEOs inducing capital structure changes. Our results suggest that corporate culture exerts an important impact on capital structure policy.

Keywords: Corporate Culture, CEO Turnover, Capital Structure Policy

JEL Classification: G32, G34, M14

Suggested Citation

Cao, Cathy Xuying and Mauer, David C., The Effect of Corporate Culture on Capital Structure Policy (March 15, 2010). Available at SSRN: https://ssrn.com/abstract=1571784 or http://dx.doi.org/10.2139/ssrn.1571784

Cathy Xuying Cao

University of Texas at Dallas - Department of Finance ( email )

P.O. Box 830688
Richardson, TX 75083-0688
United States
972-883-4898 (Phone)

David C. Mauer (Contact Author)

University of North Carolina (UNC) at Charlotte ( email )

9201 University City Boulevard
Charlotte, NC 28223
United States
704-687-7707 (Phone)

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