Ceo Extraversion and Capital Structure Decisions: The Role of Firm Dynamics, Product Market Competition, and Financial Crisis

Abstract

Using panel data of U.S. firms, we focus on an important yet understudied facet of the chief executive officer's (CEO) personality—extraversion—and how it affects corporate capital structure decisions. We examine how this relation is moderated by financing (tax) benefits, financial crisis, firm size, growth opportunities, and collateralization. The results show that firms managed by extraverted CEOs use greater financial leverage, adjusting toward target leverage levels at a faster speed, with about half‐life within a year for book and market leverage. In addition, the positive extraversion–leverage relation is enhanced for firms that are large, have greater collateralizable assets, and are more vulnerable to external shocks (financial crisis). Last, although the positive extraversion–leverage relation holds particularly when product market competition is high, the effect is attenuated for high‐growth opportunity firms.

Co-opted boards and capital structure dynamics

“…Therefore, in light of the shocks to credit markets, firms responded by cutting capital expenditures, reducing debt issuance, and relying on internal liquidity to achieve investment objectives (see Lartey et al, 2020). Under the post-crisis interaction, we find a positive but insignificant relationship.…”

“…Where the cost associated with disequilibrium exceeds the adjustment cost, the estimated adjustment coefficient should be close to zero (Gaud et al, 2005). Moreover, the swift adjustment towards the firm's capital ratio suggests that capital structure decisions are not driven by the pecking order or market timing theories when the firm's directors are co-opted (Lartey et al, 2020;Flannery and Rangan, 2006).…”

“…While the net leverage results are primarily driven by changes in debt financing, the results for total leverage incorporate the effect of cash holdings, thus suggesting that cash and debt play important roles in influencing competitive outcomes (O'Brien, 2003;Frésard, 2010). Furthermore, the presence of agency problems or the anticipation of future cash flows may also underline the differences in economic effect (Gamba and Triantis, 2008;Lartey et al, 2020). When board monitoring is weaker, the influx of free cash flow intensifies agency conflicts and gives the CEO more room for discretion (Acharya et al, 2007).…”

“…The evidence presented above indicates that board co-option leads a firm to increase in leverage ratio. However, a potential mechanism through which board co-option could result in the increase of firm leverage is grounded in the trade-off theory of capital structure, which posits that the rational firm will choose its optimal level of leverage by balancing the costs (e.g., bankruptcy costs) against the gains (e.g., tax gains/shield or reduction in agency costs) associated with debt accumulation (Lemmon and Zender, 2010;Lartey et al, 2020). Under the static trade-off theory, it is argued that firm financing policies are very importance since they affect the resources under a CEO's control (Stulz, 1990;Morellec 2004).…”

CEO overconfidence and debt covenant violations

“…3 Furthermore, we re-estimate our main models using a two-step generalized method of moments (GMM) estimation approach (Blundell & Bond, 1998) to address endogeneity issues. Indeed, modeling CEO-specific characteristics on corporate policies is a classic example of a model that is exposed to all three endogeneity problems: omitted variables, reverse causality, and measurement error (Lartey et al, 2020). For example, firm performance may drive both CEO overconfidence and the probability of covenant violation.…”