Do CEO demographics explain cash holdings in SMEs?

Abstract

This study examines the idiosyncratic manager-specific influence on a corporate cash policy.Although traditional economic theories such as trade-off theory and agency theory have already contributed to a deeper understanding of corporate cash policy, we examine whether the integration of Hambrick and Mason's (1984) upper echelons theory (UET) into these traditional theories provides additional power in explaining corporate cash holdings. We contend that social, psychological and cognitive characteristics of CEOs, proxied by a number of CEO demographics, affect the level of importance that CEOs (and shareholders) attach to the economic arguments provided by the traditional theories, in turn affecting cash policy. We test our hypotheses using a sample of Belgian privately held SMEs. Controlling for a number of operational and financial variables, our results illustrate that CEOs have a considerable influence on corporate cash holdings. In line with most of the hypotheses our principal findings suggest that longer tenured CEOs, older CEOs and CEOs with experience in a single industry are more concerned with the precautionary motive of cash and less concerned with the opportunity cost of cash, giving rise to higher cash levels compared to shorter tenured CEOs, younger CEOs and CEOs with experiences outside the current industry. We thus reveal that cash policy in Belgian privately held SMEs reflects the natural tendencies of CEOs. Since cash policy affects shareholder value, it is important for shareholders to consider the demographics of present or new CEOs, and to understand their associated inclinations concerning cash policy.

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

“…Hambrick et al (1993) explain that new CEOs have a more external focus, and is expected to be more risk avrese in financing decision, thus, they prefer less debt. As tenure increases, CEOs become more confident and will take more challenges in their financing decision (Orens and Reheul 2013). Therefore, H 6 : There is a significantly relationship between CEO tenure and financial leverage decision.…”

“…According to the UET, CEO educational is reflected in the characteristics of their organizations (Orens and Reheul 2013). Based on the theory, higher educated CEOs are less risk averse, more open to new ideas, changes and investment opportunities (Barker and Mueller 2002).…”

“…The diagram below explains how upper echelon characteristics affect corporate strategic choices. Source: Hambrick and Mason (1984) Numerous researches have been carried out on the UET, examining the relationship between leader demographics and organizational outcomes such as innovation (Kitchell 1997), R&D spending (Barker and Mueller 2002), corporate disclosure (Bamber et al 2010), firm performance (Weinzimmer 1997), and cash holding (Orens and Reheul 2013). However, the empirical significance of these studies remains largely unknown especially in terms of the relationship between a leader's cognitive, social and psychological characteristics and financial leverage.…”

Sustainable Entrepreneurship in China

“…Board experience enables directors to understand corporate culture and group dynamics more fully (Farag and Mallin, 2014). Short-tenured directors are less risk averse as they are much more receptive to new business ideas compared with longer tenured ones (Orens and Reheul, 2013). However, long-tenured directors may have the power to influence other short-tenured directors (Finkelstein and Hambrick, 1996).…”

“…The proponents of this theory argue that directors are characterized by bounded rationality. They are known to make decisions based on their social, behavioral, and psychological character (Hambrick and Mason, 1984;Orens and Reheul, 2013;Farag and Mallin, 2014).Their demographics might be used as a proxy for psychological characteristics, and the upper echelons theory assumes that directors' discretion is largely influenced by cognitive, psychological, and social factors (Orens and Reheul, 2013).…”