Powerful CEOS and Capital Structure Decisions: Evidence from the CEO Pay Slice (CPS)

Motivated by agency theory, we explore how powerful CEOs view leverage. Because of the agency conflict, CEOs may adopt sub-optimal leverage levels that promote their own private benefits at the expense of shareholders. Using Bebchuk et al. (2011) CEO pay slice (CPS) to gauge CEO power, we find that powerful CEOs view leverage negatively and avoid high debt. However, CEOs appear to adopt sub-optimal leverage only when their power is sufficiently consolidated. Relatively weak CEOs do not seem to avoid leverage. The effect of CEO power on capital structure decisions is thus nonmonotonic. Our results imply that agency problems lead to self-serving behaviour only when managers command sufficient influence in the company. Finally, we also show that our conclusion is unlikely confounded by endogeneity.