CEOs versus CFOs: Incentives and corporate policies

We undertake a broad-based study of the effect of managerial risk-taking incentives on corporate financial policies and show that the risk-taking incentives of chief executive officers (CEOs) and chief financial officers (CFOs) significantly influence their firms’ financial policies. In particular,...

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Bibliographic Details
Published in:Journal of financial economics 2010-08, Vol.97 (2), p.263-278
Main Authors: Chava, Sudheer, Purnanandam, Amiyatosh
Format: Article
Language:English
Subjects:
Accrual
Business management
Business strategies
Capital structure
Capital structure Cash balance Debt maturity Accrual Incentives
Cash balance
Chief executive officers
Chief financial officers
Debt maturity
Executive compensation
Financial management
Incentives
Management research
Management techniques
Risk management
Senior management
Stock options
Studies
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Summary:We undertake a broad-based study of the effect of managerial risk-taking incentives on corporate financial policies and show that the risk-taking incentives of chief executive officers (CEOs) and chief financial officers (CFOs) 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.
ISSN:0304-405X
1879-2774
DOI:10.1016/j.jfineco.2010.03.018