CEO Traits, Corporate Performance, and Financial Leverage

This study uses a random effect panel model to examine the impact of CEO traits and compensation on earnings performance and financial leverage for the 729 listed US companies in ExecuComp over the period of 2001– 2010. The results indicate that CEO cash compensation has a negative relationship with earnings performance, but that it has a positive impact on financial leverage. Moreover, for CEOs, longer tenure results in reduced earnings risk-taking for debt financing, but older CEOs generate higher earnings and increase debt capacity. In addition, it is also found that there is a negative relationship between CEO compensation and earnings for firms with poor performance. Cash compensation increases the use of debt for high leverage companies, but equity-based compensation decreases the use of debt for low leverage companies. A longer tenure and greater age also have a negative relationship with both earnings and debt financing for poor performance or low leverage companies. However, older CEOs generate more earnings and financing capacity for firms with good performance or high leverage.