Relationship between CEO characteristics, ownership concentration and speed of adjustment on leverage in selected Asian countries
Awareness of recapitalisation transaction costs in capital structure decisions has led to the introduction of dynamic capital structure. Since then, academicians have investigated the average speed of adjustment towards target leverage and their findings revealed that the speed varied across fir...
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| Main Author: | |
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| Format: | Thesis |
| Language: | English |
| Published: |
2019
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| Online Access: | http://ethesis.upm.edu.my/id/eprint/14251/1/FEP%202019%2025%20T.pdf |
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| Summary: | Awareness of recapitalisation transaction costs in capital structure decisions
has led to the introduction of dynamic capital structure. Since then,
academicians have investigated the average speed of adjustment towards
target leverage and their findings revealed that the speed varied across
firms, industries, countries, and years. Hence, they analysed the
determinants of the heterogeneous speeds. Nevertheless, the true nature of
the determinants is yet to be revealed. To fill the research gap, this study
examined the determinants of the speed of adjustment towards target
leverage from the upper echelons perspective.
Firstly, this study estimated the average speed of adjustment. Next, the
impact of chief executive officers’ (CEOs’) characteristics on the speed of
adjustment towards target leverage was investigated, followed by the effect
of ownership concentration on the speed of adjustment towards target
leverage. Finally, this study analysed the moderating effect of ownership
concentration on the relationship between CEOs’ characteristics and speed of
adjustment towards target leverage.
To conduct the analysis, the two-step System Generalised Method of
Moments (SYS-GMM) was employed, with samples from ASIAN countries,
specifically ASEAN (Malaysia, Singapore, Indonesia, and Thailand) from 2007 to 2017. For pooled full sample, this study affirmed that ASEAN firms
were under-adjusted towards the target leverage. Furthermore, this study
revealed that CEOs’ education level improved the speed of adjustment while
their age and experience impaired it. In addition, this study exposed the
efficient monitoring tasks of large shareholders on the speed of adjustment,
whereby they exerted their influence over older and more experienced CEOs
in adjusting more quickly towards the target leverage.
Based on the cross-country analysis, this research revealed a heterogeneous
average speed of adjustment across the countries. Moreover, this study
discovered the importance of CEOs in defining the speed of adjustment
decisions for each country. Not only that, this research also unveiled the role
of large shareholders in solving (Malaysian and Singaporean firms) or
exacerbating (Indonesian and Thai firms) CEOs’ entrenchment behaviour in
adjusting towards the target leverage. Furthermore, large shareholders were
revealed to exercise their voting rights based on the amount of readjustment
transaction costs.
One of the implications of the findings is the financial markets can provide
more financing choices to ASEAN countries for the improvement of underadjusted
financing behaviour. Besides that, CEOs shall acquire more
knowledge and skills that reduce the risk aversion behaviour towards the
speed of adjustment. For the benefit of shareholders’ wealth, large
shareholders may have to exercise their voting rights to enforce decisions
that maximise the return from their investment.
This study contributes to the capital structure in several ways. It serves as a
platform to explicitly communicate the determinants of the Dynamic Capital
Structure (Speed of Adjustment towards target leverage) based on the Upper
Echelons Theory (UET) (CEOs’ Age, Education, and Experience) and Agency
Theory (AT) (Ownership Concentration). Additionally, the findings have
added to the literature on the role of managerial competency (individualism)
within collectivist culture in making the firm decisions. |
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