Behavioral consistency in corporate finance: CEO personal and corporate leverage

We find that firms behave consistently with how their CEOs behave personally in the context of leverage choices. Analyzing data on CEOs' leverage in their most recent primary home purchases, we find a positive, economically relevant, robust relation between corporate and personal leverage in th...

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Bibliographic Details
Published in:Journal of financial economics 2012, Vol.103 (1), p.20-40
Main Authors: Cronqvist, Henrik, Makhija, Anil K., Yonker, Scott E.
Format: Article
Language:English
Subjects:
Behavioral consistency theory
Behavioural psychology
Business investment
CEO personal leverage
Chief executive officers
Corporate finance
Corporate governance
Corporate leverage
Enterprises
Leverage
Organizational behavior
Studies
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Summary:We find that firms behave consistently with how their CEOs behave personally in the context of leverage choices. Analyzing data on CEOs' leverage in their most recent primary home purchases, we find a positive, economically relevant, robust relation between corporate and personal leverage in the cross-section and when examining CEO turnovers. The results are consistent with an endogenous matching of CEOs to firms based on preferences, as well as with CEOs imprinting their personal preferences on the firms they manage, particularly when governance is weaker. Besides enhancing our understanding of the determinants of corporate capital structures, the broader contribution of the paper is to show that CEOs' personal behavior can, in part, explain corporate financial behavior of the firms they manage.
ISSN:0304-405X
1879-2774
DOI:10.1016/j.jfineco.2011.08.005