Does incentive conflict between CEOs and CFOs benefit firms? Implications for corporate decision-making

Abstract

This study evaluates how incentive conflict between CEOs and CFOs, defined as the disparity in risk-taking incentives between the two executives, impacts corporate decision-making. We find that when incentive conflict between CEOs and CFOs is larger, firms enjoy less risk through the adoption of more conservative financial policies. Greater incentive conflict is associated with lower leverage, more cash holdings and lower net debt to EBITDA ratios. This decrease in risk is not at the expense of shareholders as greater incentive conflict increases firm value. The effect of incentive conflict on risk reduction is not apparent for investment policies, suggesting that CFOs may have greater influence over financial decisions compared to investment decisions.