Manager Characteristics and the Choice of Firm “Low Leverage”: Evidence from China
ABSTRACT
In this paper, we analyze the low-leverage phenomenon of firms and examine the question of why some firms have low leverage in China. We find Low-leverage firms are smaller, have higher profitability and hold more cash balances than control firms chosen by industry and size. Our evidence supports the hypothesis that these firms are operated by risk-aversion manager. Firms with older Chief Executive Officer (CEO) and higher first shareholder ownership are more likely to have low debt. Also, CEO gender is one of the determinants of low-leverage choice.
In this paper, we analyze the low-leverage phenomenon of firms and examine the question of why some firms have low leverage in China. We find Low-leverage firms are smaller, have higher profitability and hold more cash balances than control firms chosen by industry and size. Our evidence supports the hypothesis that these firms are operated by risk-aversion manager. Firms with older Chief Executive Officer (CEO) and higher first shareholder ownership are more likely to have low debt. Also, CEO gender is one of the determinants of low-leverage choice.
Cite this paper
Chen, Y. , Zhang, X. and Liu, Z. (2014) Manager Characteristics and the Choice of Firm “Low Leverage”: Evidence from China. American Journal of Industrial and Business Management, 4, 573-584. doi: 10.4236/ajibm.2014.410062.
Chen, Y. , Zhang, X. and Liu, Z. (2014) Manager Characteristics and the Choice of Firm “Low Leverage”: Evidence from China. American Journal of Industrial and Business Management, 4, 573-584. doi: 10.4236/ajibm.2014.410062.
References
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http://dx.doi.org/10.1111/j.1755-053X.2010.01115.x [4] DeAngelo, H., DeAngelo, L. and Whited, T. (2011) Capital Structure Dynamics and Transitory Debt. Journal of Financial Economics, 99, 235-261. http://dx.doi.org/10.1016/j.jfineco.2010.09.005 [5] Morellec, E. (2004) Can Managerial Discretion Explain Observed Leverage Ratios? Review of Financial Studies, 17, 257-294. http://dx.doi.org/10.1093/rfs/hhg036 [6] Morellec, E., Nikolov, B. and Schurhoff, N. (2012) Corporate Governance and Capital Structure Dynamics. The Journal of Finance, 3, 803-847. http://dx.doi.org/10.1111/j.1540-6261.2012.01735.x [7] Booth, L., Aivazian, V., Demirguc-Kunt, A. and Maksimovic, V. (2001) Capital Structures in Developing Countries. Journal of Finance, 56, 87-130. http://dx.doi.org/10.1111/0022-1082.00320 [8] Minton, B.A. and Wruck, K.H. (2001) Financial Conservatism: Evidence on Capital Structure from Low Leverage Firms. Working Paper, Unpublished. [9] Dang, V.A. (2013) An Empirical Analysis of Zero-Leverage Firms: Evidence from UK. International Review of Financial Analysis, 30, 189-202. http://dx.doi.org/10.1016/j.irfa.2013.08.007 [10] Devos, E., Dhillon, U., Jagannathan, M. and Krishnamurthy, S. (2012) Why Are Firms Unlevered? Journal of Corporate Finance, 18, 664-682. http://dx.doi.org/10.1016/j.jcorpfin.2012.03.003 [11] Byoun, S. and Xu, Z. (2013) Why Do Some Firms Go Debt Free? Asia-Pacific Journal of Financial Studies, 42, 1-38. http://dx.doi.org/10.1111/ajfs.12009 [12] Strebulaev, I.A. and Yang, B. (2013) The Mystery of Zero-Leverage Firms. Journal of Financial Economics, 109, 1-23. http://dx.doi.org/10.1016/j.jfineco.2013.02.001 [13] Bessler, W., Drobetz, W., Haller, R. and Meier, I. (2013) The International Zero-Leverage Phenomenon. Journal of Corporate Finance, 23, 196-221.
ttp://dx.doi.org/10.1016/j.jcorpfin.2013.08.004 [14] Wu, B. (2006) A Study of Influence Factors on Low Leverage of China’s High-Tech Firms. Statistics and Decisions, 9, 126-127. [15] Zhang, X. and Chen, X. (2013) The Determinants of the Phenomenon of Zero-Leverage Firms in the Listed Real Estate Industry. The Theory and Practice of Finance and Economics, 3, 78-81. [16] Zhang, X.D., Ni, L. and Chen, Y.P. (2012) “Lower Leverage Puzzle” in China’s Listed Firms: An Empirical Study Based on Firm Efficiency. International Journal of Management and Enterprise Development, 12, 54-72. http://dx.doi.org/10.1504/IJMED.2012.046793 [17] Bertrand, M. and Schoar, A. (2003) Managing with Style: The Effect of Managers on Firm Policies. Quarterly Journal of Economics, 118, 1169-1208. http://dx.doi.org/10.1162/003355303322552775 [18] Cole, J.L., Naveen, D.D. and Naveen, L. (2006) Managerial Incentives and Risk-Taking. Journal of Finance Economics, 79, 431-468. http://dx.doi.org/10.1016/j.jfineco.2004.09.004 [19] Cadenillas, A., Cvitanic, J. and Zapatero, F. (2004) Leverage Decision and Manager Compensation with Choice of Effort and Volatility. Journal of Financial Economics, 73, 71-92.
http://dx.doi.org/10.1016/j.jfineco.2003.06.003 [20] Lewellen, K. (2006) Financing Decisions When Managers Are Risk Adverse. Journal of Financial Economics, 82, 551-590. http://dx.doi.org/10.1016/j.jfineco.2005.06.009 [21] Chava, S. and Purnanandam, A. (2010) CEOs versus CFOs: Incentive and Corporate Policies. Journal of Financial Economics, 97, 263-278. http://dx.doi.org/10.1016/j.jfineco.2010.03.018 [22] Graham, J.R., Harvey, C. and Puri, M. (2013) Managerial Attitudes and Corporate Action. Journal of Financial Economics, 109, 103-121.
http://dx.doi.org/10.1016/j.jfineco.2013.01.010 [23] Malmendier, U., Tate, G. and Yan, J. (2011) Overconfidence and Early-Life Experiences: The Effect of Managerial Traits on Corporate Financial Policies. The Journal of Finance, 66, 1687-1733.
http://dx.doi.org/10.1111/j.1540-6261.2011.01685.x [24] Graham, J.R. and Harvey, C.R. (2001) The Theory and Practice of Corporate Finance: Evidence from the Field. Journal of Financial Economics, 60, 187-243.
http://dx.doi.org/10.1016/S0304-405X(01)00044-7 [25] Huang, J. and Kisgen, D.J. (2013) Gender and Corporate Finance: Are Male Executives Overconfident Relative to Female Executives? Journal of Financial Economics, 108, 822-839.
http://dx.doi.org/10.1016/j.jfineco.2012.12.005 [26] Barros, L. and Silveira, A. (2008) Overconfidence, Managerial Optimism, and the Determinants of Capital Structure. Brazilian Review of Finance, 69, 293-335. [27] Berger, P., Ofek, E. and Yermack, D. (1997) Managerial Entrenchment and Capital Structure Decisions. The Journal of Finance, 52, 1411-1438.
http://dx.doi.org/10.1111/j.1540-6261.1997.tb01115.x [28] Titman, S. and Wessels, R. (1988) The Determinants of Capital Structure Choice. The Journal of Finance, 43, 1-19. http://dx.doi.org/10.1111/j.1540-6261.1988.tb02585.x [29] Frank, M. and Goyal, V. (2009) Capital Structure Decisions: Which Factors Are Reliably Important? Finance Management, 38, 1-37. http://dx.doi.org/10.1111/j.1755-053X.2009.01026.x [30] Gu, E., Zhang, C. and Sun, J. (2007) A Discriminating Research of the Core Influence Variables of Capital Structure. Contemporary Finance & Economics, 1, 41-48. [31] Flannery, M. and Rangan, K. (2006) Partial Adjustment toward Target Capital Structures. Journal of Financial Economic, 79, 469-506. http://dx.doi.org/10.1016/j.jfineco.2005.03.004 [32] Molina, C.A. (2005) Are Firms Underleveraged? An Examination of the Effect of Leverage on Default Probabilities. The Journal of Finance, 60, 1427-1459.
http://dx.doi.org/10.1111/j.1540-6261.2005.00766.x [33] Liu, X., Wei, F., Zhan, Y. and Tai, B.Y. (2004) An Empirical Analysis of China Listed Firms Financing Order. Accounting Research, 6, 66-72. [34] Benmelech, E. and Bergman, N. (2009) Collateral Pricing. Journal of Financial Economics, 91, 339-360. http://dx.doi.org/10.1016/j.jfineco.2008.03.003 [35] Almeida, H., Campello, M. and Weisbach, M.S. (2004) The Cash Flow Sensitivity of Cash. Journal of Finance, 59, 1777-1804. http://dx.doi.org/10.1111/j.1540-6261.2004.00679.x [36] DeAngelo, H. and DeAngelo, L. (2007) Capital Structure, Payout Policy, and Financial Flexibility. Working Paper, Unpublished.
[1] Miller, M.H. (1977) Debt and Taxes. The Journal of Finance, 32, 261-275. [2] Graham, J.R. (2000) How Big Are the Tax Benefits of Debt. The Journal of Finance, 55, 1901-1941. http://dx.doi.org/10.1111/0022-1082.00277 [3] Marchica, M. and Mura, R. (2010) Financial Flexibility, Investment Ability and Firm Value: Evidence from Firms with Spare Debt Capacity. Journal of Financial Management, 39, 1339-1365.
http://dx.doi.org/10.1111/j.1755-053X.2010.01115.x [4] DeAngelo, H., DeAngelo, L. and Whited, T. (2011) Capital Structure Dynamics and Transitory Debt. Journal of Financial Economics, 99, 235-261. http://dx.doi.org/10.1016/j.jfineco.2010.09.005 [5] Morellec, E. (2004) Can Managerial Discretion Explain Observed Leverage Ratios? Review of Financial Studies, 17, 257-294. http://dx.doi.org/10.1093/rfs/hhg036 [6] Morellec, E., Nikolov, B. and Schurhoff, N. (2012) Corporate Governance and Capital Structure Dynamics. The Journal of Finance, 3, 803-847. http://dx.doi.org/10.1111/j.1540-6261.2012.01735.x [7] Booth, L., Aivazian, V., Demirguc-Kunt, A. and Maksimovic, V. (2001) Capital Structures in Developing Countries. Journal of Finance, 56, 87-130. http://dx.doi.org/10.1111/0022-1082.00320 [8] Minton, B.A. and Wruck, K.H. (2001) Financial Conservatism: Evidence on Capital Structure from Low Leverage Firms. Working Paper, Unpublished. [9] Dang, V.A. (2013) An Empirical Analysis of Zero-Leverage Firms: Evidence from UK. International Review of Financial Analysis, 30, 189-202. http://dx.doi.org/10.1016/j.irfa.2013.08.007 [10] Devos, E., Dhillon, U., Jagannathan, M. and Krishnamurthy, S. (2012) Why Are Firms Unlevered? Journal of Corporate Finance, 18, 664-682. http://dx.doi.org/10.1016/j.jcorpfin.2012.03.003 [11] Byoun, S. and Xu, Z. (2013) Why Do Some Firms Go Debt Free? Asia-Pacific Journal of Financial Studies, 42, 1-38. http://dx.doi.org/10.1111/ajfs.12009 [12] Strebulaev, I.A. and Yang, B. (2013) The Mystery of Zero-Leverage Firms. Journal of Financial Economics, 109, 1-23. http://dx.doi.org/10.1016/j.jfineco.2013.02.001 [13] Bessler, W., Drobetz, W., Haller, R. and Meier, I. (2013) The International Zero-Leverage Phenomenon. Journal of Corporate Finance, 23, 196-221.
ttp://dx.doi.org/10.1016/j.jcorpfin.2013.08.004 [14] Wu, B. (2006) A Study of Influence Factors on Low Leverage of China’s High-Tech Firms. Statistics and Decisions, 9, 126-127. [15] Zhang, X. and Chen, X. (2013) The Determinants of the Phenomenon of Zero-Leverage Firms in the Listed Real Estate Industry. The Theory and Practice of Finance and Economics, 3, 78-81. [16] Zhang, X.D., Ni, L. and Chen, Y.P. (2012) “Lower Leverage Puzzle” in China’s Listed Firms: An Empirical Study Based on Firm Efficiency. International Journal of Management and Enterprise Development, 12, 54-72. http://dx.doi.org/10.1504/IJMED.2012.046793 [17] Bertrand, M. and Schoar, A. (2003) Managing with Style: The Effect of Managers on Firm Policies. Quarterly Journal of Economics, 118, 1169-1208. http://dx.doi.org/10.1162/003355303322552775 [18] Cole, J.L., Naveen, D.D. and Naveen, L. (2006) Managerial Incentives and Risk-Taking. Journal of Finance Economics, 79, 431-468. http://dx.doi.org/10.1016/j.jfineco.2004.09.004 [19] Cadenillas, A., Cvitanic, J. and Zapatero, F. (2004) Leverage Decision and Manager Compensation with Choice of Effort and Volatility. Journal of Financial Economics, 73, 71-92.
http://dx.doi.org/10.1016/j.jfineco.2003.06.003 [20] Lewellen, K. (2006) Financing Decisions When Managers Are Risk Adverse. Journal of Financial Economics, 82, 551-590. http://dx.doi.org/10.1016/j.jfineco.2005.06.009 [21] Chava, S. and Purnanandam, A. (2010) CEOs versus CFOs: Incentive and Corporate Policies. Journal of Financial Economics, 97, 263-278. http://dx.doi.org/10.1016/j.jfineco.2010.03.018 [22] Graham, J.R., Harvey, C. and Puri, M. (2013) Managerial Attitudes and Corporate Action. Journal of Financial Economics, 109, 103-121.
http://dx.doi.org/10.1016/j.jfineco.2013.01.010 [23] Malmendier, U., Tate, G. and Yan, J. (2011) Overconfidence and Early-Life Experiences: The Effect of Managerial Traits on Corporate Financial Policies. The Journal of Finance, 66, 1687-1733.
http://dx.doi.org/10.1111/j.1540-6261.2011.01685.x [24] Graham, J.R. and Harvey, C.R. (2001) The Theory and Practice of Corporate Finance: Evidence from the Field. Journal of Financial Economics, 60, 187-243.
http://dx.doi.org/10.1016/S0304-405X(01)00044-7 [25] Huang, J. and Kisgen, D.J. (2013) Gender and Corporate Finance: Are Male Executives Overconfident Relative to Female Executives? Journal of Financial Economics, 108, 822-839.
http://dx.doi.org/10.1016/j.jfineco.2012.12.005 [26] Barros, L. and Silveira, A. (2008) Overconfidence, Managerial Optimism, and the Determinants of Capital Structure. Brazilian Review of Finance, 69, 293-335. [27] Berger, P., Ofek, E. and Yermack, D. (1997) Managerial Entrenchment and Capital Structure Decisions. The Journal of Finance, 52, 1411-1438.
http://dx.doi.org/10.1111/j.1540-6261.1997.tb01115.x [28] Titman, S. and Wessels, R. (1988) The Determinants of Capital Structure Choice. The Journal of Finance, 43, 1-19. http://dx.doi.org/10.1111/j.1540-6261.1988.tb02585.x [29] Frank, M. and Goyal, V. (2009) Capital Structure Decisions: Which Factors Are Reliably Important? Finance Management, 38, 1-37. http://dx.doi.org/10.1111/j.1755-053X.2009.01026.x [30] Gu, E., Zhang, C. and Sun, J. (2007) A Discriminating Research of the Core Influence Variables of Capital Structure. Contemporary Finance & Economics, 1, 41-48. [31] Flannery, M. and Rangan, K. (2006) Partial Adjustment toward Target Capital Structures. Journal of Financial Economic, 79, 469-506. http://dx.doi.org/10.1016/j.jfineco.2005.03.004 [32] Molina, C.A. (2005) Are Firms Underleveraged? An Examination of the Effect of Leverage on Default Probabilities. The Journal of Finance, 60, 1427-1459.
http://dx.doi.org/10.1111/j.1540-6261.2005.00766.x [33] Liu, X., Wei, F., Zhan, Y. and Tai, B.Y. (2004) An Empirical Analysis of China Listed Firms Financing Order. Accounting Research, 6, 66-72. [34] Benmelech, E. and Bergman, N. (2009) Collateral Pricing. Journal of Financial Economics, 91, 339-360. http://dx.doi.org/10.1016/j.jfineco.2008.03.003 [35] Almeida, H., Campello, M. and Weisbach, M.S. (2004) The Cash Flow Sensitivity of Cash. Journal of Finance, 59, 1777-1804. http://dx.doi.org/10.1111/j.1540-6261.2004.00679.x [36] DeAngelo, H. and DeAngelo, L. (2007) Capital Structure, Payout Policy, and Financial Flexibility. Working Paper, Unpublished.