The Effect of CEO Characteristics on Firm performance and capital structure

Abstract

The Chief Executive Officer (CEO) of a company is undoubtedly the most important person in not only driving the day to day operations of a business but most importantly the company’s strategy. CEOs therefore have a crucial impact on a firm’s financial performance as well as the firm’s capital structure. Especially in emerging markets, this relationship has been given little attention and has so far not been researched. This paper investigated the link between a CEO’s characteristics and the firm’s performance as well as the capital structure. A CEO’s age, gender, tenure and education level were used as the CEO’s characteristics. Their effect on the company was compared in emerging markets and developed markets. Samples were taken from companies in Mexico, Indonesia, South Africa and the US. The sample period was chosen to be from January 2014 to December 2017, containing a four-year period. System Generalised Methods of Moments as well as Ordinary Least Squares and Two-Stage Least Squares regression models were used to analyse the data. Capital structure was measured through the debt-to-equity ratio and the long-term-debt-tototal- capitalisation ratio. Several firm specific variables were used in this regression, which include asset tangibility, profit, company size, sales growth, return-on-equity and price-tobook ratio. Profit, return-on-equity and return-on-assets were used as measures of firm performance. In this regression, asset tangibility, company size, sales growth, debt-to-assets ratio and price-to-book ratio were used as the firm specific variables. It was found that older CEOs were linked to higher debt-to-equity ratios in all markets, while CEO tenure was a positive determinant of firm performance. Gender had different impacts in the emerging markets and the developed market. While in emerging markets, male CEOs were linked to a better firm performance, the opposite was found in the developed market. Additionally, the return on equity and the company’s profit were significant determinants of firm performance. While return on equity was a negative determinant, profit was positively linked to firm performance.