Abstract
Executives act based on their experiences, values, personality and personal interpretation of the situations which they face in their companies. Investigations in the field of Behavioral Corporate Finance have determined that there are some relations between CEOs’ personal traits and financial decisions of large companies, but these results are based on indirect personal trait measurements and on public companies. To see whether such relations also exist between CEOs’ personal traits and the financial structure of large private companies, we used psychometric tests to measure their level of optimism, risk attitude and affect heuristic, collected financial data for a period of fourteen years, and considered the economic situation of the country as a key factor in these relations. This paper reports the relationship of executives’ personal traits with the financial structure of large Spanish companies for the period 2001–2014. We observed that executives’ high optimism (and risk aversion attitude) is positively (negatively) related to long-term debt, whilst positive affect is directly associated to the financial leverage and short-term debt. This paper also reports a change of relations when taking into account the country’s economic situation. In effect, by considering this new variable, executives’ risk aversion is seen to be associated to financial leverage and short-term debt, whilst CEOs’ positive affect is linked to long-term debt. These relations are strongly moderated and they become statistically significant in a contracting economic period. In conclusion, the links between CEOs’ personal traits and financial structure of large private Spanish companies make sense when the effect of the economic situation is taken into account. Furthermore, the awareness of these links helps to understand the financial decisions taken within large Spanish companies.
Highlights
IntroductionIn order to gain a better understanding of corporate decision-making by Chief Executive Officers (hereinafter, CEOs), it had been hypothesized that executives act on the basis of their
Our findings suggest that the relationship of CEOs’ positive affect with the leverage of companies is significant when it is strongly moderated by the expansion period
We have shown that there are several links between CEOs’ personal traits and the financial leverage of large private Spanish companies for the analyzed period 2001–2014
Summary
In order to gain a better understanding of corporate decision-making by Chief Executive Officers (hereinafter, CEOs), it had been hypothesized that executives act on the basis of their. Highly optimistic CEOs are associated with high levels of shortterm debts [5] The investigations in this field usually focus on large public companies and show shortcomings such as indirect CEOs’ personal traits measurement [2] and subjective financial data [5]. CEOs’ positive affect is directly related to the financial leverage and to the short-term debt of companies This is because, when they handle short-term debt affairs, they probably expect higher profits and perceive a lower risk of funding. Despite CEOs’ positive expectations of funding with long-term debt, the level of debt which executives perceive as acceptable to avoid high risks is lower in a contracting rather than an expanding economic period.
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