CEO Personal Attributes and Corporate Decisions

Abstract

This thesis examines the effect of CEOs’ personal attributes on CEOs’ optimistic behaviour and further investigates their effect on corporate leasing and hedging decisions. We integrate behavioural finance with management, leadership and psychological approaches to provide a better understanding of the influence of personal attributes on CEO optimistic behaviour and decision making. By investigating 248 CEOs who worked with the UK FTSE 100 firms from 2000 to 2013, we find that CEO personal attributes (traits, skills & experiences, and networking) do cultivate CEOs’ optimistic behaviour (acquisitiveness in the Mergers and Acquisitions (M&A) market). CEO personal traits that were examined in this study are age, gender, nationality and marital status. We find (chapter 2) that for CEO personal traits; younger, male, married and UK nationality CEOs are likely to be optimistic. CEO skills and experiences (e.g. their educational background (MBA, or PhD holder), founder status, financial literacy, duality, tenure as CEO, and emoluments) have also been found to have significant positive relationships with CEO optimism. In the case of CEO networking attributes, we examine CEOs’ internal networking (tenure with the firm, and internal promotion), and CEO external networking ties (external directorships, and social networking prestige) and find that CEO networking ties have a significant positive influence on triggering CEO optimistic behaviour. In addition, we propose three personal attributes indexes, namely Traits Index (TI), Skills and Experiences Index (SEI), and Networking Index (NI). Once again all the indexes have a significant influence on cultivating CEO optimistic behaviour. This thesis adds to the growing literature on behavioural finance by proposing an alternative proxy to managerial optimism (chapter 2) – the CEO Optimism Index (CEOOI) - and by investigating the influence of CEOOI on corporate decisions such as corporate leasing (chapter 3) and hedging decisions (chapter 4). This study uses manually collected information relating to Mergers and Acquisitions, Stock Option exercise behaviour, Insider Transaction and CEO personal attributes. In addition, we also manually collected data on operating lease, finance lease and total lease for corporate leasing analysis (chapter 3) and the derivative instruments data for a study of corporate hedging (chapter 4). The results (chapter 3) suggest that optimistic CEOs tend to use more lease financing. This finding is in line with the notion that optimistic CEOs are reluctant to raise external funding by issuing new equity as they believe that the capital market tends to undervalue their firms (Heaton, 2002). Additionally, since optimistic CEOs are highly confident of their own ability to bring in future earnings, they are unwilling to share the potential earnings with new equity holders and avoid this by choosing lease financing (lease is a type of debt). Hedging decisions results (chapter 4) indicate that optimistic CEOs employ more financial derivatives to hedge potential firm risks. Optimistic CEOs have high self-confidence, are committed to the firm’s good outcome and believe they themselves can control the firm’s future earnings; hence they use derivative instruments to control and reduce the firm’s cash flow volatility to deliver more predictable outcomes. Our findings provide evidence that CEOs’ personal attributes and optimistic behaviour affected corporate leasing and hedging decisions. Our study suggests that recognizing the presence and importance of CEO personal behaviour will help bridge the gap between the theory and practice of corporate decisions.