Two Essays on Capital Structure Decisions of the Firm: An Empirical Analysis of the Impact of Managerial Entrenchment and Ethical Corporate Citizenship

Autor: Ampofo, Akwasi Amankwaah
Rok vydání: 2021
Předmět:
Druh dokumentu: Dissertation
Popis: This dissertation consists of two essays on the impact of managerial entrenchment and ethical corporate citizenship on capital structure decisions of the firm. The first essay examines the impact of managerial entrenchment on financial flexibility and capital structure decisions of firms. Agency conflicts and asymmetric information between managers and shareholders of firms exacerbate managerial entrenchment, which is operationalized using the entrenchment index. The excess cash ratio of a firm over the median cash ratio of firms within the same 3 digits SIC code is the proxy for financial flexibility. Capital structure decisions include the extent and maturity of debt as proxied by debt-to-equity ratio, and average debt maturity respectively. Results indicate that compared to managers who are not entrenched, entrenched managers obtain less rather than more debt, and they use long-term rather than short-term debt maturity. Also, entrenched managers keep more excess cash than managers who are not entrenched. This is especially the case for firms in small and large market value groups compared to medium sized firms. Results do not change before, during, and after the 2008 global economic crisis. The second essay examines the impact of ethical corporate citizenship and CEO power on cost of capital, and firm value in the context of stakeholder theory. Firms listed as World's Most Ethical Companies (WMECs) exemplify ethical corporate citizenship, which is operationalized as a binary variable of 1 for WMECs, and zero for non-WMECs. This paper matches WMECs and non-WMECs control firms in the same 3 digits SIC code, and within 10 percent of total assets. CEO power is primarily measured using CEO pay slice calculated as CEO total compensation as a percentage of top 5 executives of the firm. Powerful CEOs have pay slice above the 50th percentile, and weak CEOs pay slice is below the 50th percentile. Tobin's q is the proxy for firm value, and cost of capital is measured as the market value weighted cost of debt, and cost of equity. Results indicate that WMECs have neither lower cost of capital nor higher Tobin's q than matched control sample of non-WMECs. Firms led by powerful CEOs have significantly lower cost of debt capital, and lower industry-adjusted Tobin's q than firms led by weak CEOs. The negative impact of CEO power on firm value is consistent with agency theory that self-interested CEOs extract firm value for personal advantage, subject to managerial controls. Results have implications for research and practice in capital structure, corporate governance, CEO compensation, and corporate social responsibility.
Doctor of Philosophy
This study consists of two essays. Essay 1 examines the impact of managerial entrenchment on financial flexibility, and leverage decisions of the firm. Managerial entrenchment is measured using the entrenchment index. The excess cash ratio of a firm over the median cash ratio of firms measures financial flexibility. Capital structure decisions include the extent and maturity of debt as measured by debt-to-equity ratio, and average debt maturity respectively. I find that entrenched managers use less debt than managers who are not entrenched. Also, entrenched managers prefer using long-term rather than short-term debt, and they keep more excess cash than managers who are not entrenched. This is especially the case for small and large firms compared to medium sized firms. Essay 2 investigates the impact of ethical corporate citizenship and CEO power on cost of capital, and firm value. Ethical corporate citizenship (ECC) refers to firms' commitment to a culture of ethics, effective governance, leadership, and innovation. ECC is measured as a binary variable of one if a firm is listed on World's Most Ethical Companies (WMEC), and zero otherwise. CEO power is primarily measured using CEO pay slice that is calculated as CEO total compensation as a percentage of top 5 executives of the firm. Powerful CEOs have pay slice above the 50th percentile, and weak CEOs pay slice is below the 50th percentile. WMECs and non-WMECs in the same 3 digits standard industry classification, which have similar total assets as the WMECs are compared. I find that WMECs have neither lower cost of capital nor higher Tobin's q than non-WMECs. Powerful CEOs often utilize their influence to reduce cost of debt capital, but also reduce firm value compared to weak CEOs. Self-interested CEOs who extract firm value for personal advantage partly explains the negative effect of CEO power on firm value.
Databáze: Networked Digital Library of Theses & Dissertations
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