The Impact of Managerial Traits on Corporate Investment

Abstract

This thesis examines the impact of the firm’s dominant structure and ability on corporate, financing and investment activities. Particularly, CEO duality is examined as a structure whose power and board supremacy provides a single agent with highly centralized power. Second with the use of Demerjian et al. (2012) managerial ability index, CEO managerial ability is quantified and assessed in the context of corporate activity and performance.
The empirical analysis shows that the impact of CEO duality engages to misallocations which affect investment efficiency and verifying that such regime increases unprofitable investment which is detrimental to the firm value. Furthermore, this thesis provides strong support that the adverse impact of CEO duality on investment efficiency prevails only among firms that face high agency problems, as captured by high free cash flows, firm complexity, staggered board structure, low board independence, and medium-sized board. However, CEOs’ equity-based compensation, high managerial ability, as well as the occurrence of externally promoted CEO curb the negative effect of CEO duality on internal capital allocation efficiency.
Furthermore, this thesis evinces a positive relation between pre-crisis managerial ability and crisis period investments. This occurs because of the capacity of firms with higher pre-crisis managerial ability to secure greater financing and to keep their firms less vulnerable to financial constraints, which in turn help mitigate severe underinvestment problems evident during the financial crisis. Interestingly, the positive relation between managerial ability and investments holds only for firms with CEOs who have general managerial skills (generalists) rather than firm-specific skills (specialists). When looking at the value implications of the main findings, it is observed that the stock market positively assesses crisis period investments, yet this effect is solely evident among firms characterized by high levels (i.e., above-median) of pre-crisis managerial ability.
Overall the evidence in this thesis informs, for the first time, the agency theory regarding the mechanism through which CEO duality is destructive for internal capital markets and firm value, and sheds light on the importance of certain moderators that can mitigate the negative impact of CEO duality on investment allocation and efficiency. Regarding the management team as a whole, the findings of this thesis show that managerial ability can ameliorate inefficiencies during distress times, through gaining access to more resources, investing at greater levels and more efficiently than less able peers, thus, adding to the value of firms.