Does capital structure mediate the link between CEO characteristics and firm performance?

Abstract

Purpose

The purpose of this paper is to empirically capture the impact of a chief executive officer’s (CEO) personal and organizational characteristics on firm performance in the context of a developing country and to explore whether capital structure mediates the relationship between CEO characteristics and firm performance.

Design/methodology/approach

In order to test the hypothesized model, CEO duality, tenure and personal characteristics (age, gender and education) were taken as explanatory variables to study their impact on firm performance. Data were collected from 179 Pakistani companies from 2009–2015. The collected data were processed via panel data regression analysis under fixed effect assumptions.

Findings

Results show that CEO duality has a negative impact on firm performance and that a CEO with a dual role is more inclined toward debt financing. Moreover, a CEO with a longer tenure tends to be opportunistic and prioritize his/her personal interest while making strategic financial decisions, thus creating agency costs for the firm. Furthermore, CEO characteristics like age, gender and education have significant effects on firm financial decisions and firm performance. Finally, the debt and equity ratio partially mediates the link between CEO characteristics and firm performance.

Research limitations/implications

The findings of this study have limited generalizability due to the specific nature of the sample characteristics.

Originality/value

To the best of the authors knowledge, this study is the first to explore the impact of CEO characteristics on capital structure and firm performance. This work is also the first to explore the mediating role of capital structure in the relationship between CEO characteristics and firm performance by using Pakistani data.

Citation

Naseem, M.A., Lin, J., Rehman, R.u., Ahmad, M.I. and Ali, R. (2020), "Does capital structure mediate the link between CEO characteristics and firm performance?", Management Decision, Vol. 58 No. 1, pp. 164-181. https://doi.org/10.1108/MD-05-2018-0594