<scp>CEO</scp> inside debt and investment‐cash flow sensitivity

Han, Jianlei; Pan, Zheyao

doi:10.1111/acfi.12104

“…Tam (2014) interprets his results, in the spirirt of Fazzari et al (1988), as the parent's listing status helping to mitigate the subsidiary's financial constraint. 23 Han and Pan (2015) show a higher investment-cash flow sensitivity for CEOs with higher inside debt holdings. They interpret their results, in the spirit of Kaplan and Zingales (2010), as CEOs with higher inside debt holding acting in a risk-averse manner by avoiding external financing, hence amplifying the investment-cash sensitivity.…”

Section: Cash Holdings Financially Constraint and Liquiditymentioning

confidence: 90%

A Contemporary View of Corporate Finance Theory, Empirical Evidence and Practice

Faff

¹

,

Gray

²

,

Tan

³

2015

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This paper uses a survey of Australian Corporate Treasurers to shed light on the gap between the theory and practice of corporate finance in Australia. Seven areas are examined: capital structure, payout policy, cash holdings, initial public offerings, seasoned equity offering, mergers and acquisitions, and corporate governance. We also exploit the Global Financial Crisis to examine the effect of liquidity shocks on a firm's capital structure choices. We then compare our Australian survey results with results from a comprehensive U.S. survey conducted by Graham and Harvey (2001). Our survey shows that the board of directors play the most important role in determining capital structure decisions and that corporate treasurers play the most important role in cash holding decisions. This contrasts with the academic literature that has typically focused on the role of CEO in both capital structure and cash holdings decisions. In addition, our respondents do not view the tax advantage of interest deductibility to be of first order of importance for debt issuance choices, which contrasts with most of the U.S. empirical studies. Finally, we juxtapose the theory-practice perspective, with a review of the most recent five years (2011)(2012)(2013)(2014)(2015) of corporate finance research published in the leading Asia Pacific Basin finance journals. Abstract This paper uses a survey of Australian Corporate Treasurers to shed light on the gap between the theory and practice of corporate finance in Australia. Seven areas are examined: capital structure, payout policy, cash holdings, initial public offerings, seasoned equity offering, mergers and acquisitions, and corporate governance. We also exploit the Global Financial Crisis to examine the effect of liquidity shocks on a firm's capital structure choices. We then compare our Australian survey results with results from a comprehensive U.S. survey conducted by Graham and Harvey (2001). Our survey shows that the board of directors play the most important role in determining capital structure decisions and that corporate treasurers play the most important role in cash holding decisions. This contrasts with the academic literature that has typically focused on the role of CEO in both capital structure and cash holdings decisions. In addition, our respondents do not view the tax advantage of interest deductibility to be of first order of importance for debt issuance choices, which contrasts with most of the U.S. empirical studies. Finally, we juxtapose the theory-practice perspective, with a review of the most recent five years (2011)(2012)(2013)(2014)(2015) of corporate finance research published in the leading Asia Pacific Basin finance journals.

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“…Tam (2014) interprets his results, in the spirit of Fazzari et al (1988), as the parent's listing status helping to mitigate the subsidiary's financial constraint. 23 Han and Pan (2015) show a higher investment-cash flow sensitivity for CEOs with higher inside debt holdings. They interpret their results, in the spirit of Kaplan and Zingales (2000), as CEOs with higher inside debt holding acting in a risk-averse manner by avoiding external financing, hence amplifying the investment-cash sensitivity.…”

Section: Cash Holdings Financially Constraint and Liquiditymentioning

confidence: 90%

“…Alternatively, 14% of respondents identified the CEO as less important in determining cash level. By contrast, much of the cash holding literature focuses more on how cash holdings are influenced by the CEO's compensation package including the CEO's inside debt holdings (Han and Pan, 2015) and the CEO's options holdings (Liu and Mauer, 2011).…”

Section: Who Decides the Cash Holdings For The Organisation?mentioning

confidence: 99%

A contemporary view of corporate finance theory, empirical evidence and practice

Faff

¹

,

Gray

²

,

Tan

³

2016

Australian Journal of Management

12

0

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This paper uses a survey of Australian Corporate Treasurers to shed light on the gap between the theory and practice of corporate finance in Australia. Seven areas are examined: capital structure, payout policy, cash holdings, initial public offerings, seasoned equity offering, mergers and acquisitions, and corporate governance. We also exploit the Global Financial Crisis to examine the effect of liquidity shocks on a firm's capital structure choices. We then compare our Australian survey results with results from a comprehensive U.S. survey conducted by Graham and Harvey (2001). Our survey shows that the board of directors play the most important role in determining capital structure decisions and that corporate treasurers play the most important role in cash holding decisions. This contrasts with the academic literature that has typically focused on the role of CEO in both capital structure and cash holdings decisions. In addition, our respondents do not view the tax advantage of interest deductibility to be of first order of importance for debt issuance choices, which contrasts with most of the U.S. empirical studies. Finally, we juxtapose the theory-practice perspective, with a review of the most recent five years (2011)(2012)(2013)(2014)(2015) of corporate finance research published in the leading Asia Pacific Basin finance journals. Abstract This paper uses a survey of Australian Corporate Treasurers to shed light on the gap between the theory and practice of corporate finance in Australia. Seven areas are examined: capital structure, payout policy, cash holdings, initial public offerings, seasoned equity offering, mergers and acquisitions, and corporate governance. We also exploit the Global Financial Crisis to examine the effect of liquidity shocks on a firm's capital structure choices. We then compare our Australian survey results with results from a comprehensive U.S. survey conducted by Graham and Harvey (2001). Our survey shows that the board of directors play the most important role in determining capital structure decisions and that corporate treasurers play the most important role in cash holding decisions. This contrasts with the academic literature that has typically focused on the role of CEO in both capital structure and cash holdings decisions. In addition, our respondents do not view the tax advantage of interest deductibility to be of first order of importance for debt issuance choices, which contrasts with most of the U.S. empirical studies. Finally, we juxtapose the theory-practice perspective, with a review of the most recent five years (2011)(2012)(2013)(2014)(2015) of corporate finance research published in the leading Asia Pacific Basin finance journals.

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“…Dow and Raposo (2005) find that linking managerial compensation to performance targets can induce managers to undertake overly ambitious investment projects, which may harm shareholder wealth. Han and Pan (2016) argue, where risk‐taking CEOs (those shaped by inside debt holdings) tend to increase firm risk, external debt financing becomes prohibitively costly. In this spirit, risk‐taking CEOs rely on more internal cash flows when financing their investments.…”

Section: Literature Review and Hypotheses Developmentmentioning

confidence: 99%

“…From a managerial entrenchment perspective, using performance‐vested EBC actually incentivises managers to game the system at the cost of shareholder wealth (Healy, 1985; Gaver et al ., 1995; Kuang, 2008). While performance hurdles encourage greater risk taking, external debt financing will become prohibitively costly as the firm risk increases (Han and Pan, 2016), leading to a higher ICS. We then explore the details of performance hurdles used in the EBC contract.…”

Section: Introductionmentioning

confidence: 99%

Can CEO equity‐based compensation limit investment‐related agency problems?

Qu

¹

,

Percy

²

,

Hu

³

et al. 2021

Accounting & Finance

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Previous research suggests that investment‐cash flow sensitivity (ICS) has arisen from agency costs. This study investigates whether equity‐based compensation (EBC) reduces these costs. We find that ICS is lower when companies grant EBC to chief executive officers (CEOs). EBC with long‐term vesting periods, and especially with graded vesting conditions, is associated with a lower ICS. EBC with performance hurdles is associated with higher sensitivity. However, when the performance hurdles are set as a relative market index rather than an absolute target, the sensitivity becomes lower. Our results suggest that appropriately designed EBC plays an important role in mitigating investment‐related agency problems.

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CEO inside debt and investment‐cash flow sensitivity

Cited by 17 publications

References 32 publications

A Contemporary View of Corporate Finance Theory, Empirical Evidence and Practice

A Contemporary View of Corporate Finance Theory, Empirical Evidence and Practice

A contemporary view of corporate finance theory, empirical evidence and practice

Can CEO equity‐based compensation limit investment‐related agency problems?

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