Abstract
This paper examines the non-linearity between Chief Executive Officer (CEO) power and firm leverage using a sample of 295 selected small and medium-sized enterprises listed on China Shenzhen Stock Exchange SMEs Board during the period 2009–2013. Specifically, a threshold estimation technique developed by Hansen (J Econ 93(2):345–368, 1999) is applied to investigate whether firms with powerful CEO use a sub-optimal leverage. The results confirm that there is a double-threshold effect exist and suggest an inverted U-shaped relationship between CEO power and firm book value-based leverage. Thus, these findings reveal that the distribution of decision-making power within firms can affect financing decision are made and CEOs with higher ability to exercise decision-making power tend to use lower leverage to pursue their own benefits.
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Notes
Welch (2011) provides evidence to demonstrate that FD/AT is not an appropriate measure of leverage. We wish to thank one of the referees who pointed out this issue.
PCA method can automatically produce the weights of factors while retaining as much of the original variability in the data as possible.
We would like to thank one of the referees who pointed out that on the one hand, firm leverage can be a voluntary choice from managers; on the other hand, it can be submitted to a certain level of pressure by others, such as the BOD and a large shareholder. Accordingly, it is important to add the control variables related to the BOD and ownership structure.
We also perform the Bartlett test of Sphericity (BTS) and the Kaiser–Meyer–Olkin test of appropriateness (KMO) to ensure the use of PCA. The BTS is statistically significant (p = 0.00) and the KMO value for the PCA is 0.70 being above the recommended 0.60 indicating that it is appropriate to carry out the PCA.
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Acknowledgements
The authors would like to thank the two anonymous referees for their valuable comments and insightful suggestions and the editor, Professor Wolfgang Kürsten, for his guidance and encouragement. These recommendations substantially improve the paper. Any remaining errors are our own.
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Appendix
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Munir, Q., Li, T. Nonlinearity between CEO power and firm leverage: evidence from the threshold model. Rev Manag Sci 12, 593–620 (2018). https://doi.org/10.1007/s11846-016-0224-x
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DOI: https://doi.org/10.1007/s11846-016-0224-x