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Capital Structure, CEO Dominance, and Corporate Performance

45 Pages Posted: 2 Apr 2011  

Pornsit Jiraporn

Pennsylvania State University - School of Graduate Professional Studies (SGPS)

Pandej Chintrakarn

Mahidol University International College (MUIC)

Yixin Liu

University of New Hampshire

Date Written: April 1, 2011

Abstract

We use agency theory to investigate the influence of CEO dominance on variation in capital structure. Due to agency conflicts, managers may not always adopt leverage choices that maximize shareholders’ value. Consistent with the prediction of agency theory, the evidence reveals that, when the CEO plays a more dominant role among top executives, the firm adopts significantly lower leverage, probably to evade the disciplinary mechanisms associated with debt financing. Our results are important as they demonstrate that CEO power matters to critical corporate outcomes such as capital structure decisions. In addition, we find that the impact of changes in capital structure on firm performance is more negative for firms with more powerful CEOs. Overall, the results are in agreement with prior literature, suggesting that strong CEO dominance appears to exacerbate agency costs and is thus detrimental to firm value.

Keywords: capital structure, agency costs, leverage, CEO dominance, CEO power, agency theory, CEO centrality

JEL Classification: G32, G34

Suggested Citation

Jiraporn, Pornsit and Chintrakarn, Pandej and Liu, Yixin, Capital Structure, CEO Dominance, and Corporate Performance (April 1, 2011). Available at SSRN: https://ssrn.com/abstract=1800863 or http://dx.doi.org/10.2139/ssrn.1800863

Pornsit Jiraporn (Contact Author)

Pennsylvania State University - School of Graduate Professional Studies (SGPS) ( email )

30 E. Swedesford Road
Malvern, PA 19355
United States
(484) 753-3655 (Phone)

HOME PAGE: http://www.personal.psu.edu/pxj11/index1.html

Pandej Chintrakarn

Mahidol University International College (MUIC) ( email )

999 Buddhamonthon 4 Road
Salaya, Nakhonpathom, 73170
Thailand
66 (0) 2441 5090 (Phone)
66 (0) 2441 9745 (Fax)

Yixin Liu

University of New Hampshire ( email )

Durham, NH 03824
United States
603-862-3357 (Phone)

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