What Does CEOs' Personal Leverage Tell Us About Corporate Leverage?

Date Added: Aug 2009
Format: PDF

The authors find that firms behave remarkably similarly to how their CEOs behave personally when it comes to leverage choices. They start the analysis by compiling a comprehensive sample of home purchases and financings among S&P 1,500 CEOs. Debt financing in a CEO's most recent home purchase is used as a revealed preference of the CEO's personal attitude towards debt. They find a robust positive relation between personal and corporate leverage. They also find that firms tend to hire CEOs with a similar personal attitude towards debt as the previous CEO. When the new and previous CEOs have different personal preferences, corporate leverage changes in the direction of the new CEO's personal leverage. These results support a model with endogenous matching of CEOs to firms.