CEOs vs. CFOs: Incentives and Corporate Policies

46 Pages Posted: 19 Mar 2008 Last revised: 26 Oct 2015

See all articles by Sudheer Chava

Sudheer Chava

Georgia Institute of Technology - Scheller College of Business

Amiyatosh Purnanandam

University of Michigan, Stephen M. Ross School of Business

Date Written: February 3, 2009

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 Classification: G30, G32

Suggested Citation

Chava, Sudheer and Purnanandam, Amiyatosh, CEOs vs. CFOs: Incentives and Corporate Policies (February 3, 2009). Available at SSRN: https://ssrn.com/abstract=989224 or http://dx.doi.org/10.2139/ssrn.989224

Sudheer Chava

Georgia Institute of Technology - Scheller College of Business ( email )

800 West Peachtree St.
Atlanta, GA 30308
United States

HOME PAGE: http://www.prism.gatech.edu/~schava6/

Amiyatosh Purnanandam (Contact Author)

University of Michigan, Stephen M. Ross School of Business ( email )

701 Tappan Street
Ann Arbor, MI MI 48109
United States

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