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CEOs versus CFOs: Incentives and corporate policies

Sudheer Chava and Amiyatosh Purnanandam

Journal of Financial Economics, 2010, vol. 97, issue 2, 263-278

Abstract: 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.

Keywords: Capital; structure; Cash; balance; Debt; maturity; Accrual; Incentives (search for similar items in EconPapers)
Date: 2010
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