Are financially sophisticated CEO’s more efficient when it comes to investing?

Abstract

This study aims to examine the relationship between the financial sophistication (FS) of the Chief Executive Officer (CEO) and the efficiency of corporate investments using empirical analysis in a sample of 189 companies listed on the B3 S.A. - Brasil, Bolsa, Balcão (B3), from 2010 to 2021. Research on the individual characteristics of managers has mainly explored aspects related to decisions on companies’ financial policies. Thus, this study seeks to add a new element to the discussion by investigating how these characteristics are related to the efficient use of resources available for investment. By examining the relationship between CEO FS and investment efficiency, it contributes to the discussion in the literature on how manager characteristics affect the way in which decision makers run companies. This adds new insights to the understanding of how the financial skills and individual characteristics of managers can influence organizational performance and results. The research is relevant in presenting the relationship between CEO expertise and investment decisions in the Brazilian market, where the supply of capital tends to be low (financial constraint); consequently, investing more assertively and efficiently has an impact on the organization’s results and longevity. Using a proxy that measures investment efficiency, regressions were run using the generalized method of moments (sys-GMM) and multinomial regression. The analyses suggest that CEO FS is related to investment efficiency in several ways. When FS is measured in terms of components, past experience is negatively related to deviations from the optimal level of investment. However, the international component is positively related to such deviations. In addition, a multinomial analysis showed that CEO experience helps reduce the probability of underinvestment, suggesting that an experienced CEO tends to contribute to the efficiency of company investments.