Upper Echelon Theory Revisited: The Relationship between CEO Personal Characteristics and Financial Leverage Decision

Abstract

From the upper echelons perspective, we investigate the financial leverage decision of publicly listed companies in Bursa Malaysia for the period from 2002 to 2011. Using pooled OLS and fixed-effect regressions, we examine the impacts of CEO personal characteristics on financial leverage. Our measures of CEO personal characteristics such as CEO overconfidence based on CEO profile photo, CEO age, and CEO prior experience are significantly and negatively related to leverage. However, CEO education level and CEO tenure are significantly and positively related to leverage. Furthermore, we partition our sample of companies based on CEO age and CEO education level. In the CEO-age group, we find that female CEOs are greater risk takers as compared to male CEOs in Malaysia. With respect to CEO education level, we show that younger CEOs, female CEOs, and longer-serving CEOs are risk takers and more aggressive. This paper contributes to the debate of the UET as well as determinants of leverage decision from several dimensions. First, this is the first study that investigates the impacts of CEO personal characteristics on financial leverage of Malaysian firms. Second, we make the first attempt by classifying CEO certain characteristic (age and educational level) into groups to make a further comparison on the impact of CEO personal characteristics on financial leverage. Third, this study uses a larger data sample and a longer study period than the previous studies in the literature. Fourth, the paper also makes a methodological contribution. This study employs different methods (pooled OLS regression and fixed effects panel regression) for the analysis. It is hoped that the result of this paper can fill the gap of the literature on the relationship between CEO personal characteristics and financial leverage as explained by Upper Echelon Theory.

What characteristics of board of directors affect Indonesian bank performance?

“…Another demographic factor that could influence the firm performance is the director's age, as discovered by Amran, Yusof, Ishak, and Aripin (2014). Ting, Azizan, and Kweh (2015) found that younger CEOs are more likely to be aggressive and risk-taking. While Cline & Yore (2016) found that the age of S&P firm CEOs were negatively related to firm value and performance.…”

Influência das características da equipe de gestão sobre a tomada de decisão de risco: evidências do ramo de restaurantes

“…A Teoria dos Escalões Superiores (do inglês Upper Echelon Theory), introduzida originalmente por Hambrick e Mason (1984) menciona que as características cognitivas e demográficas influenciam na estratégia adotada pelos CEO's ou pelas equipes de gestão e, assim, nos resultados organizacionais e nos níveis de desempenho (Hambrick & Mason, 1984). A TES sugere que quanto mais complexa uma decisão, por exemplo, medidas estratégicas, mais relevantes se tornam as características cognitivas e demográficas dos tomadores de decisões, tais como a idade e o tempo no cargo (Ting et al, 2015). Isso porque as equipes de gestão são caracterizadas pela racionalidade limitada e tomada de decisão com base no seu cognitivo e social (Ting et al, 2015).…”

“…A TES sugere que quanto mais complexa uma decisão, por exemplo, medidas estratégicas, mais relevantes se tornam as características cognitivas e demográficas dos tomadores de decisões, tais como a idade e o tempo no cargo (Ting et al, 2015). Isso porque as equipes de gestão são caracterizadas pela racionalidade limitada e tomada de decisão com base no seu cognitivo e social (Ting et al, 2015).…”

“…Tendo em vista a dificuldade de medir as características cognitivas, Hambrick (2007) sugere as características demográficas como alternativa, visto que esses fatores refletem a base e os valores cognitivos dos CEO's e são facilmente observáveis. Alguns estudos têm utilizado as características demográficas dos CEO's da TES para explicar a relação entre e as participações societárias (Oren & Reheul, 2013), tomada de risco (Li & Tang, 2010;Farag & Mallin, 2016;Lee & Moon, 2016), despesa com P&D (Barker & Mueller, 2002), divulgação financeira (Bamber, Jiang & Wang, 2010), alavancagem financeira (Ting et al, 2015) e estratégia de aversão ao risco (Moon et al, 2017).…”

“…Os estudos empíricos sobre a Teoria dos Escalões Superiores têm analisado a correlação entre as características dos executivos e a tomada de risco (Li & Tang, 2010;Farag & Mallin, 2016;Lee & Moon, 2016). Os resultados demostram que as equipes com gestores mais velhos são mais avessas ao risco e mais conservadoras (Farag & Mallin, 2016;Orens & Reheul, 2013;Ting, Azizan & Kweh, 2015). Revelam também que as equipes com gestores ocupando o mesmo cargo por longo tempo tornam-se avessos ao risco e possuem uma menor probabilidade de implantar mudanças (Farag & Mallin, 2016;Lee & Moon, 2016;Moon & Sharma;Lee, 2017;Orens & Reheul, 2013).…”