The influence of CEO past experience and connectedness on corporate decision-making

Li, Junchen (2023). The influence of CEO past experience and connectedness on corporate decision-making. University of Birmingham. Ph.D.

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Abstract

A large number of studies have explored the determinants of corporate decision-making during the past few decades. However, these studies invariably focus on the role of firm or external ownership characteristics in predicting corporate decision-making while overlooking the characteristics of chief executive officers (CEOs) involved in policy implementation. Under such background, this thesis examines how CEO characteristics, especially CEO academic experience and internal coalition, affect corporate decision-making.

Using all A-share Chinese firms listed on Shanghai Stock Exchange and Shenzhen Stock Exchange during 2008-2019, we first investigate the impact of CEO academic experience on corporate risk-taking. We find that firms having CEOs with academic experience are associated with less volatile earnings. The results still hold after accounting for potential endogeneity issues using the Heckman two-stage model and propensity score matching (PSM) approach. Moreover, the results are robust when we use alternative measures, additional controls, and a non-financial crisis period sample. In further analysis, we find firms having CEOs with academic experience mainly adopt conservative financial policies (i.e., holding more liquid assets and reducing the debt burden of the firm) to lower corporate risk-taking. Finally, we find the reduction in corporate risk-taking attributable to CEO academic experience has no impact on firm performance.

We next investigate the impact of internal coalition, measured by the proportion of non-CEO top executives/directors recruited after the current CEO assumes office, on accounting conservatism. Using all firms listed on the Chinese A-share market from 2003 to 2019, we find that firms with higher internal coalition tend to exhibit lower accounting conservatism, as reflected in less timely recognition of bad news in earnings. We also find the negative association is more prominent for non-state-owned enterprises (non-SOEs). The main results still hold when we employ the instrument variable (IV) approach, retaining a sample with no change in internal coalition for two consecutive years, and exogenous CEO turnover to address endogeneity concerns. Further analysis suggests that the chief financial officer (CFO) recruited by the current CEO has no effect on reducing accounting conservatism. Finally, we find that independent directors (not) involved in internal coalition become less (more) independent, thereby reducing (improving) accounting conservatism.

Lastly, based on all firms listed on the Chinese A-share market during the 2003-2019 period, we examine the impact of internal coalition on corporate cash holdings. We find that firms with higher internal coalition tend to hold less cash. We also find the negative effect of internal coalition on corporate cash holdings tempers among SOE firms. Our findings are robust when we consider the endogeneity problems, alternative measures of corporate cash holdings and internal coalition, non-manufacturing sample, additional controls, and CEO fixed effects. In the additional analysis, we find that firms with higher internal coalition mainly spend their excess cash on value-destroying capital expenditures, reflected in the lower market value of corporate cash holdings. At last, we find the adverse effect of internal coalition is mitigated in firms having CEOs with lower power.

Type of Work:

Thesis (Doctorates > Ph.D.)

Award Type:

Doctorates > Ph.D.

Supervisor(s):