Abstract
Using a sample of listed Indian manufacturing companies, this study examines the role of chief executive officer’s (CEO’s) personal characteristics like age, tenure, education, and career experience in the determination of investment decisions of the firm. The dynamic panel data model estimation, more specifically the system generalized method of moments estimation results reveal a negative relation between CEO’s age and corporate investment. CEO’s financial education is positively associated with investment decisions. The investment cash flow sensitivity analysis posits that CEO’s age and financial education reduce the sensitivity of investment with respect to cash flow. The results are robust across different periods, defined on the basis of crises. In times of financial crisis, we document that firm’s liquidity and age, CEO’s career experience and tenure turn out to be significant determinants of corporate investment. This paper provides an out-of-sample evidence of the role of CEO’s personal characteristics on the determination of corporate investment, which is an unexplored issue from an emerging market perspective.
Highlights
The determinants of corporate investment have been mainly explained by the traditional corporate finance theories such as agency theory (Jensen & Meckling, 1976) and asymmetric information theory (Myers & Majluf, 1984).Consistent with these theories, the empirical studies find that cash flow, growth opportunities, profitability, and financial leverage are the major determinants of the corporate investment
Using a sample of listed Indian manufacturing companies, this study examines the role of chief executive officer’s (CEO’s) personal characteristics like age, tenure, education, and career experience in the determination of investment decisions of the firm
Extant literature on corporate finance has documented that the chief executive officer (CEO) plays a central role in firm’s decisions making process (Jensen & Meckling, 1976), and corporate investment decisions of a firm might be influenced by the inherent cognitive biases of the CEO
Summary
The determinants of corporate investment have been mainly explained by the traditional corporate finance theories such as agency theory (Jensen & Meckling, 1976) and asymmetric information theory (Myers & Majluf, 1984).Consistent with these theories, the empirical studies find that cash flow, growth opportunities, profitability, and financial leverage are the major determinants of the corporate investment. Extant literature on corporate finance has documented that the chief executive officer (CEO) plays a central role in firm’s decisions making process (Jensen & Meckling, 1976), and corporate investment decisions of a firm might be influenced by the inherent cognitive biases of the CEO. Despite such facts, the relationship between corporate investment decisions and personal characteristics of the CEO has been largely unexplored in the standard finance literature. The upper echelons theory (UET) of Hambrick and Mason (1984) considers organization as a reflection of its top managers and the outcome of an organization are considerably influenced by the values and characteristics of decision makers
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