Corporate Leverage: How Much Do Managers Really Matter?
Murray Z. Frank
University of Minnesota
Vidhan K. Goyal
Hong Kong University of Science & Technology (HKUST) - Department of Finance; Hong Kong University of Science & Technology (HKUST) - Department of Finance
March 14, 2007
This paper studies the effect of top managers on corporate financing decisions. Differences among CEOs account for a great deal of the variation in leverage among firms. This effect can account for the firm fixed effects on capital structure stressed by Lemmon et al (2006). After a CEO is forced out, leverage typically declines. Firms that offer higher pay-for-performance to the top executives, adjust leverage to target more rapidly. CEO personal characteristics are not closely connected to corporate leverage choices. To some extent the CEO may be serving as a proxy for an entire management team. The CFO seems to play at least as important a role as the CEO in determining corporate leverage.
Number of Pages in PDF File: 42
Keywords: Capital structure, behavioral finance, executive compensation, CEO, CFO
JEL Classification: G32
Date posted: March 16, 2007