Using the hand-collected database of CEOs’ financial experiences in the listed companies in China over the period of 2001 to 2014, and based on the Upper Echelon Theory and from the perspective of heterogeneous managers, this paper investigates whether and how CEOs’ financial experiences influence the cost of equity capital. In order to avoid the influence of firm fixed effects and other time-invariant unobservable effects, we test our empirical predictions by utilizing the case of CEO turnover and the model of DID（difference in difference）. We find a significant negative relationship between CEOs’ financial experiences and the cost of equity capital, firms headed by CEOs with financial experiences have a lower cost of equity capital compared with the firms managed by CEOs without financial experiences, and moreover, we also find that this negative relationship is more pronounced in firms with bad governance than those with better governance, but we do not find a similar difference emerges between firms with different ownerships. Taking into account the possible endogeneity issues in the model, we further apply several other alternative methods like two-step instrumental variables and propensity score matching methods. Meanwhile, in order to guarantee the robustness of the results, a number of robustness tests are conducted, such as alternative measures, alternative model specifications and so on. All the results indicate that CEOs’ financial experiences can significantly reduce the cost of equity capital. Additionally, further research also finds that CEOs’ financial experiences help reduce earnings management, raise debt levels and reduce financing constraints. This result suggests that the negative impact of CEOs’ financial experiences on the cost of equity capital may be achieved by the path of reducing information asymmetry and financial risks. This paper contributes to the literature and practice in the following two ways. First, in theory, our findings extend the literature that examines the determinants of the cost of equity capital, add the literature on the effect of top managers’ heterogeneous background characteristics, and also provide empirical support for the Upper Echelons Theory. Second, in practice, our study sheds a light on the motivation of why more and more companies are willing to appoint these executives with financial experiences to the CEO position and other executive positions, and will also have a reference value for CEOs’ selection and appointment in a company, as well as for optimizing the governance mechanism to mitigate the negative effects of top managers’ heterogeneity characteristics on the policies of firms.
Can CEOs’ Financial Experiences Reduce the Cost of Equity Capital？
Foreign Economics & Management Vol. 40, Issue 09, pp. 96 - 111 (2018) DOI:10.16538/j.cnki.fem.2018.09.008
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Cite this article
Li Xiaolin, Ye Dezhu, Zhang Zijian. Can CEOs’ Financial Experiences Reduce the Cost of Equity Capital？[J]. Foreign Economics & Management, 2018, 40(9): 96-111.