Introduction
The impact of CEO characteristics on a company's financial policies is an essential subject of research in corporate finance CEOs wield enormous power over the financial strategies and decisions that form a company's financial course (Pham Duc Huy, 2021) Investigating the relationship between CEO characteristics and financial policies can provide insights into company governance and financial decision-making According to upper echelons theory (UET) (Hambrick & Mason, 1984) important corporate decisions are influenced by the characteristics of the CEO who is considered the face of the business Understanding how CEO traits impact financial policies might give useful insights for business governance and CEO selection Therefore, there is much need for research on CEO characteristics (Sani Saidu, 2019); (Duc Huy Pham & Quoc Viet Pham, 2020) A company's financial policy is the set of decisions and principles that the company establishes to manage its finances Financial policies define how a company manages and uses its cash and assets to ensure efficient operations and meet business and financial goals Research by (Custódio and Metzg, 2014) shows that the policies of companies with CEOs with a lot of working experience tend to hold little cash and often borrow money to invest, and older CEOs often reduce the risk due to their business industry through less discretionary investment policies (Matthew A Serfling, 2013) Companies may make better-informed judgments about hiring CEOs with characteristics corresponding to their financial goals and risk profiles Therefore, this study aims to measure the impact of CEO characteristics on the financial policies of companies in the context of Vietnam
Conducting the study to investigate the relationship between various CEO characteristics (duality, age, education, gender, ownership, and tenure) and the financial policies (cash holdings, leverage) of companies in VN100
To attain these goals, the following research questions are addressed below
• How do CEO duality, age, education, gender, ownership, and tenure affect cash holdings and leverage of VN100 firm?
• Do CEO characteristics have a differential impact on different financial policy decisions (cash holdings and leverage)?
The study might find that older CEOs are more likely to maintain higher cash reserves (positive impact on cash) but utilize debt financing cautiously (negative impact on leverage) Higher CEO education might be associated with both lower cash holdings (due to potential investment opportunities) and higher leverage CEOs with significant ownership stakes in the company might be more conservative with leverage to minimize risk to their personal investment Longer CEO tenure could correlate with lower cash holdings and leverage as the focus shifts towards shareholder distribution or growth initiatives
This research can contribute to the understanding of corporate governance and financial decision-making in the Vietnamese context Investors can assess potential risks and opportunities associated with a company's leadership style based on CEO characteristics Boards of directors can utilize these findings to consider CEO characteristics when making selection and incentive structure decisions Moreover, regulators might use these insights to evaluate market efficiency and identify potential areas for improvement
The research is structured into five distinct chapters, each addressing a specific aspect of the investigation
Chapter 1, The Introduction, offers a concise overview of the research topic, covering its purpose, objectives, conclusions, and overall structure In this chapter, the research topic is introduced comprehensively, encapsulating its aims, methodology, findings, and overall framework
Chapter 2 will provide a literature review regarding this subject This chapter will first summarize previous research on this topic both domestically and internationally This will help readers understand the research From there, it shows that CEO characteristics have a significant relationship with finance policy, such as duality, age, education, gender, ownership, and tenure
Chapter 3 Extensively addresses the research methods, encompassing data collection procedures, data processing techniques, and the formulation of regression equations Within this chapter, detailed explanations are provided regarding the methods employed for data collection, data processing, and the derivation of regression equations
Chapter 4 Offers a presentation of the data analysis results It involves the examination and interpretation of the outcomes of panel regression analyses and a comprehensive discussion of the findings in alignment with the research inquiries and hypotheses The results show how the CEO's education level, experience and tenure influence the policy decisions made for the company
In Chapter 5, Conclusions and evidence-based recommendations are drawn from the research findings These recommendations aim to enhance general knowledge and contribute, in part, to the decision-making processes of executives when they are selecting a CEO for their businesses Moreover, suggestions are made for future research initiatives that can build upon the findings of this study.
Literature Review
Theoretical framework
The report draws upon the Upper Echelons Theory (UET) developed by Donald C Hambrick and Phyllis A Mason in 1984, which stands as a pivotal theory in the fields of strategic management and corporate governance This theory focuses on the role of top- level managers in shaping and influencing the strategies and performance of organizations
Hambrick and Mason proposed a novel emphasis in macro-organizational research: the dominance coalition of an organization, particularly its top-level managers The outcomes of an organization – both its strategy and effectiveness – are regarded as reflections of the cognitive base of the powerful actors within the business According to the Upper Echelons Theory, the decisions and behaviors of top-level managers (including CEOs and other senior executives) are deeply influenced by their individual factors, such as age, gender, tenure, and professional expertise Hambrick and Mason argued that these factors create a
"values and beliefs system" that influences the strategic decisions and behaviors of top- level managers, thus impacting the performance and success of the enterprise
The individual factors of top-level managers are considered diverse and heterogeneous, reflecting the diversity of individuals and their experiences The Upper Echelons Theory emphasizes the influence of these factors on the strategic decisions of the business and the differences between enterprises can be explained by considering variations in the values and beliefs system of top-level management The Upper Echelons Theory (UET) posits three explanations for the conservative stance of older CEOs Firstly, older CEOs may have diminished physical and mental capacities, leading to reduced openness to new ideas and innovations CEO age has a negative correlation with the ability to absorb new information in decision-making processes Secondly, the UET suggests that older CEOs have a strong psychological attachment to the company's performance Thirdly, financial stability is crucial for older CEOs, leading them to avoid risky actions that may jeopardize their interests (Carlsson & Karlsson, 1970, as cited in the study) Hambrick and Mason (1984) argue that younger CEOs are more likely to make riskier financial decisions, leading to an increased use of financial leverage Furthermore, experience also influences CEO behavior according to the Upper Echelons Theory (UET) CEOs with more years of experience possess deeper social knowledge, social relationships, and understanding of the business, leading to more profound decision-making capabilities
A common application of the Upper Echelons Theory is in explaining the diversity of strategies and performance among businesses in the same industry By studying and analyzing the individual factors of top-level managers, researchers and managers can gain a deeper understanding of the factors influencing the strategy and performance of the enterprise
Hambrick and Mason utilized a dataset comprising 238 CEOs from the 50 largest food retail companies in the United States from 1965 to 1980 The authors acknowledged that demographic factors may not reliably provide information about the essence of individuals such as personality, values, and beliefs Human beings are more complex and require deeper research (Zaleznik and Kets de Vries, 1975)
Figure 2.1: Upper echelons perspective of organizations Source: Hambrick and Mason (1984)
CEO characteristics and Corporate Financial policies
Criteria such as profitability and operating efficiency are often used by investors to make investment decisions Businesses must rely on financial leverage and the ability to hold cash to bring capital to the business Therefore, it is necessary to choose a CEO who is suitable for the business The Chief Executive Officer (CEO) is the person responsible for setting direction and running the company, with different characteristics of the director affecting the company's financial policy decisions, so the book "The CEO Effect” by (Hambrick & Mason; 1984) was born to study the relationship between CEO qualities and company performance It is undeniable that the importance of CEOs in businesses increases over time, so studies on the impact of CEO characteristics on financial policies such as investment, debt, cash holdings and leverage has increased (Custódio &; Metzger, 2014; Phan Bui Gia Thuy, 2017; Pham Duc Huy, 2021; Sitthipongpanich &; Polsiri, 2012)
2.2.1 CEO characteristic and cash holding
Jaemin Lim et al (2019) investigated the relationship between corporate cash holdings and CEO characteristics The study found that CEO characteristics have a negative and significant impact on cash holdings, implying that as tenure increases, CEOs' experience, expertise, and knowledge also increase, and these CEOs tend to reduce cash holdings to maintain their reputation
Seung Hun Han et al (2017) examined the impact of CEO characteristics on cash value using data from listed companies in Korea The study found that companies with CEOs with a business background have significantly higher cash values than those with other backgrounds, but there is no significant impact for CEOs with a science and engineering background Furthermore, companies with CEOs with an MBA have higher excess cash values Age and tenure have a negative impact on the value of cash
Nilmawati NILMAWATI et al (2021) delve into the influence of CEO demographic characteristics, encompassing age, functional experience, educational background, and gender, on corporate leverage decisions It further explores the moderating role of independent directors in the interplay between CEO demographic characteristics and leverage decisions The study utilizes panel data drawn from a sample of 283 non-financial companies listed on the Indonesia Stock Exchange (BEI) spanning the period from 2010 to
2017 Moderated regression analysis serves as the analytical technique employed, with a fixed effects model being selected The findings reveal that male and younger CEOs exhibit a greater aversion to risk, consequently inclining them towards higher debt utilization Notably, the study fails to uncover any evidence of an impact exerted by CEO experience and education level on leverage
Rupinder Kaur et al (2021) employing a sample of 307 non-financial companies listed in the Nifty 500 index, the panel regression analysis unveils a positive and statistically significant correlation between CEO tenure and corporate leverage Furthermore, a higher degree of leverage is observed in organizations helmed by younger CEOs This phenomenon can be attributed to the heightened importance of career and financial security for older executives The findings further reveal a negative and statistically significant relationship between CEO shareholding and leverage This stems from the fact that these executives have a substantial portion of their wealth embedded in the company in the form of firm-specific human capital and common stock Consequently, insiders are disincentivized from employing the optimal amount of debt for the firm due to the potential for increased bankruptcy risk associated with higher debt levels.
CEO characteristics
2.3.1 The role of the chief executive
In an organization or enterprise, the Chief Executive Officer (CEO) plays the most crucial role in leading and managing all activities of the organization The CEO is not only the top leader but also holds the highest responsibility in building and executing business strategies, managing finances and human resources, and shaping the organizational culture In the business context of Vietnam, the role of the CEO is not limited to leadership but also includes the responsibility for all production and business activities of the enterprise, while also being legally accountable for all financial matters of the organization (Tran Thi Nguyet Nga, 2022)
Therefore, the characteristics of the CEO directly influence the choice of financial policies for the enterprise (Phan Bui Gia Thuy, 2017) Emphasized the importance of understanding the personal and professional characteristics of the CEO in shaping financial policies Decisions regarding financial strategy, including capital management, investment, and risk management, often reflect the philosophy and management style of the CEO CEO with extensive experience and knowledge in finance may prefer conservative financial strategies, focusing on optimizing profitability and achieving sustainable growth Conversely, a CEO inclined to invest heavily in research and market expansion may adopt aggressive financial strategies, albeit with higher risks Thus, understanding the CEO's characteristics is crucial for predicting and gaining a better understanding of the direction of the company's financial policies, thereby optimizing financial management and achieving maximum business performance
According to Hambrick and Mason's superior theory, that there is a relationship between the CEO's age and financial decisions According to the theory, the older the CEO's age, the more stable and cautious the decisions the CEO makes Conversely, younger CEOs tend to take more risks in financial policy decisions, and younger executives tend to take risks (Guthrie and Olian, 1991) According to innovation and adaptation theory, a CEO's age can affect their ability to drive innovation and adapt to a changing business environment Older CEOs are better able to adapt to fluctuations in their surroundings Younger CEOs, on the other hand, have the ability to drive innovation and have disruptive growth strategies, at a young age they have more active energy and can come up with many innovative ideas According to Theory of Constraints - TOC, older CEOs with more experience are more socially savvy and they can offer more advice and values about social and human factors (Murray, 1989) From the above theories, we can see that there are 2 conflicting opinions One side believes that older CEOs will bring financial policies that benefit the business The other side said that young CEOs are capable of making more innovative policies to help businesses grow It is easy to see that depending on the different timeline of the business, it will be suitable for the different age of the CEO (Pham Duc Huy, 2021) The study expects the impact of CEO age on corporate financial policy to be non-linear
Currently, the percentage of CEOs with female gender is less than that of CEOs with male gender However, the emergence of female CEOs is gradually increasing This is a good sign for women because it shows that gender equality is gradually existing in modern society Moreover, the role of women is gradually being affirmed, many studies suggest that businesses run by women will perform better than men Because of the unique characteristics of women, female CEOs often have better compensation policies for employees, CEOs can promote development for subordinates In addition, they have many different experiences from society and life, so they have breakthroughs in decisions, according to Smith et al (2006) However, there are also many opinions that female CEOs are less effective than male CEOs, they are often indecisive, they often mobilize less capital and human resources In addition, Fairlie and Robb, (2009), female CEOs are often limited by household businesses Despite conflicting opinions, female CEOs are often appreciated for building a healthy working environment, paying appropriate employee salaries, good working attitude, prudence and not being overconfident (Tate and Yang, 2015)
2.3.4 Education and expertise of the CEO
Competence is the most important factor to help recruiters choose executives for their business And competence is also an essential factor to help CEOs make financial policies to run a successful business Identifying and measuring competence is not easy However (Cheng et al 2010) argues that competence is expressed at educational level, we can refer to educational level as a characteristic that represents competence The CEO's education level indicates that the CEO has the ability to adapt and learn quickly, the highly educated person is a person with extensive professional knowledge and logical thinking, capable of analyzing strategic situations In addition, the learning environment helps CEOs build useful relationships for themselves and the business (Jalbert et al 2002) studied and showed that CEOs with graduate degrees have a positive correlation with corporate performance In addition, knowledge and qualifications will help CEOs make reasonable policies and strategies, CEOs with degrees in management, finance, economics will have better thinking and leadership skills than CEOs with degrees in engineering, language (Bertrand and Schoar, 2003) However, there are studies that have found no link between a CEO's education level and company performance, (Palia, 2001) arguing that education level is insufficient to assess a CEO's competence Therefore, the study expects the right level of education and expertise to have the same results as the financial performance of the company
The time in which a CEO assumes a leadership role in a business, is an important topic in management and business studies A CEO's tenure can affect a business in many ways A manager's experience reflects a manager's level of understanding of the working environment both internally and externally, thus yielding a wealth of useful knowledge (Zeki Simsek, 2007) Proposing that the CEO can gain experience during his tenure, the longer the experience gives the CEO the ability to judge and devise appropriate strategies (Hambrick and Fukutomi, 1991) argues that long-term CEOs have strong relationships with stakeholders and that is the intangible value that long-term CEOs can bring to the business
In addition, the style of highly experienced CEO managers is also suitable for key employees, which creates a close bond between employees and executives However, there are also negative impacts if the CEO's tenure is too long (Miller, 1991) states that managers lose interest in the corporate environment after each year of work In addition, CEOs with too long tenure will tend to refuse to innovate, difficult to adapt and apply old methods that may no longer be suitable for the new era In addition, CEOs with too long tenures will create losses if they retire and the business does not have an effective succession plan
In order for executives to operate in the interests of shareholders (Jensen and Meckling, 1976), it was encouraged to attach the relationship between shareholders and CEOs through stock ownership This can motivate the CEO to achieve good results for the company (Elsila et al 2013) conducted research based on the above theory and found that there is a similar relationship between the CEO's stock holding ratio and the company's performance However, there is also research suggesting that there is a non-linear relationship between CEO stock ownership and company performance (Ghosh et al 2007) has found Research and Development (R&D) increases when CEO ownership is at 5% and decreases when CEO share ownership is in the range of 5% to 25%, and will eventually rise again if the rate exceeds 25% This demonstrates that executives tend to be willing to invest more in R&D when there is a low share ownership ratio and are somewhat more careful when the share ownership ratio is higher In addition, an increase in the CEO's share ownership ratio does not always try to match the interests between the CEO and shareholders Because the likelihood of a conflict of interest is so high, the CEO may choose to act on personal interests rather than other shareholders (Bhagat & Bolton, 2013) has shown that CEO holding more stocks reduces the company's performance Therefore, using the ratio of shares to shareholder interest is a "double-edged sword", we expect the study to produce non-linear results.
Hypothesis development
In Vietnam, research on CEO characteristics and company financial policies is limited After researching and researching CEO characteristics that affect company financial policies, there are many different views But we have summarized them into main research directions as follows:
Determining a CEO's leadership capacity is not easy, but a CEO's leadership capacity can be demonstrated by that person's educational level (Jalbert et al.; 2002) suggest that CEOs with university or postgraduate degrees have positive efficiency with cash holdings and financial leverage Custódio and Metzger (2014) especially emphasize the CEO's work experience as an important factor in a company's financial policy They found that CEOs with financial expertise and experience tend to hold less cash and borrow more to invest Managers with a Master of Business Administration (MBA) degree appear to use more aggressive financial strategies and make investment decisions that are more consistent with financial theories But believe that a high level of education is not enough, the CEO must have knowledge of economics, finance, or management to help the CEO manage human resources better and come up with many appropriate policies to develop the company So the hypothesis is:
H1: Education and professional qualifications of CEOs with business majors have a positive impact on cash holdings and leverage
Research Abor and Biekpe (2007) shows that female CEOs may choose to use less debt in the company's capital structure for CEOs This suggests that CEOs rarely invest in high- risk investments, consistent with the results reported by Faccio et (2012) That could be due to personality traits, relationships, and work experience For these reasons, companies with female CEOs can survive longer than companies run by male CEOs.Therefore the hypothesis is:
H2: Female CEO gender has a positive impact on cash holdings and leverage
The share ownership ratio will affect the CEO's management policy Owning shares will affect the personal interests of the CEO, making the CEO tend to introduce safe, less risky policies and develop the company more firmly The higher the ownership ratio, the more cautious the CEO is with financial policy decisions Based on the research sample of (Jermias and Gani; 2014), shows that owning shares has a positive impact on the performance of managers when they are supervised and advised by competent board members professional As a consequence, having the hypothesis:
H3: CEO's share ownership ratio has a positive impact on cash holdings and leverage
The age of the CEO affects the performance of the business According to research by (Cheng et al.; 2010) shows that older CEOs are experienced and have a lot of experience running the company, they will pass on experiences that are beneficial to the business's operations Serfling (2013), using data on non-financial firms listed on ExecuComp from
1992 to 2010, studies the relationship between CEO age and firm risk-taking behavior and shows that Older CEOs reduce corporate risk through less risky financial and investment policies There is research showing that young CEOs tend to be creative, like to innovate and have a higher ability to learn and remember They accept risks and are more adventurous with their decisions (Guthrie and Olian, 1991) This is consistent with the era of innovation and development, requiring breakthroughs in business operating policies H4: CEO age has a negative impact on strong financial leverage
There is an old saying "Experience is the best teacher" Experience helps CEOs develop the ability to manage and adapt to economic fluctuations as well as make better strategies and forecasts of the financial situation Experienced managers are also more proactive in managing cash and leverage According to Custódio and Metzger (2014), businesses run by CEOs with financial expertise are less likely to face financial challenges, face cash flow risk because they respond more quickly to tax avoidance and capital incentives In addition, CEOs with many years of experience will have business relationships, resources to raise capital, and social relationships that are intangible assets that every business dreams of having So the hypothesis is:
H5: CEO tenure is positively associated with cash holdings and leverage.
Data & Methodology
Data
This research focuses on publicly traded companies in Vietnam The sample will encompass the 100 firms with the highest market capitalization, liquidity, and free float ratio on the HoSE The data will span 12 years, from 2010 to 2022 CEO characteristics data will be collected from the companies' Annual Reports and Vietstock during each period This will result in a database of 350 CEOs over 12 years Since this thesis has more observations on the same date, this research will use a panel data set which will be handled in Stata
The study will incorporate corporate financial policy, which will be determined by cash holdings (Cash), and leverage Cash holdings represent the firm's cash and cash equivalents at the end of the reporting period relative to its total assets Leverage measures the firm's total debt relative to its total assets All corporate financial policy data will be extracted from the audited consolidated financial statements of the companies during each period This is also the dependent variable in the research model
Regarding dependent variables, the selected CEO characteristics including the CEO duality, age, education, gender, percentage ownership, and tenure are independent variables in the research model The CEO duality (DUAL) is a dummy variable, taking the value one if the CEO is also the chairman of the board and 0 if not CEO age (AGE) is the CEO's age in years CEO education (EDU) is a dummy variable, taking a value of 1 if the CEO has a financial background and 0 otherwise CEO gender (GEN) is a dummy variable, taking the value 1 if the CEO is female and 0 if male CEO ownership (OWN) is the CEO's direct and indirect shareholding ratio in the company CEO tenure (TENURE) as the CEO of the entity in years
Following prior research (Nguyen & Nguyen, 2020), this research also has a group of commonly utilized control variables Specifically, having two control variables: firm size (SIZE), which is determined by the natural logarithm of total assets at year-end; and firm age (FAGE) is the natural logarithm of years since the establishment.
Models and Data Analysis
This study will research the link between CEO characteristics and corporate financial policy This research will use a panel data set since this thesis has more observations for more executives at different moments To examine whether there is a relationship between the independent variables and the dependent variable, this research will use regression analyses
• Financial policy (Y) = alpha + beta*CEO characteristic (X)+ beta*control variables
• Cash= ∝0+ β*Dual+β2*Age+ β3*Edu+ β4*Gen+β5*Own+β6*Size+ β7*Fage + Ɛ
• Leverage=∝0+β1*Dual+ β2*Age+ β3*Edu+ β4*Gen+β5*Own+β6*Size+ β7*Fage + Ɛ where ∝0 is constant terms; ε is error terms
Table 3.1: A summary of all variables used in this study: definition and measurement
This study uses ordinary least squares regression to test the hypothesis about the relationship between CEO characteristics and corporate financial policy Thus, the study will use Stata to find the coefficients of the formula With the help of Stata, this research aims to make clear what the effect of every single independent variable is, and what the magnitude of the effect is Further, it will be shown if the relationship is significant The hypotheses will be tested on 1%, 5%, and 10% significance levels Further, this research will show the goodness of fit with the help of the R-squared.
Results & Discussions
Descriptive statistics
The statistics on CEO characteristics and financial policy along with the control variables are described in Table 4.1, including the number of observations, mean, standard deviation, minimum and maximum values
Table 4.1 Descriptive statistics of the CEO characteristics and financial policy
The findings presented in Table 4.1 indicate that the firm's Cash has a mean of 0.083%, with a standard deviation of 0.095% The lowest and highest Cash values are 0.003% and 0.454%, respectively The Leverage of the examined firms has a mean value of 0.576%, with a standard deviation of 0.234% The Leverage levels range from a minimum of 0.106% to a maximum of 0.945%
Delving into the characteristics of the CEOs, the average values for the variables Dual and Edu are 87.1% and 76.9%, respectively These figures suggest that a substantial proportion of CEOs in Vietnamese listed companies simultaneously hold the position of Chairman of the Board of Directors and that many CEOs possess financial expertise Conversely, the average value of the variable Gen is relatively low, at 11.6%, indicating that the majority of CEOs are male The average value of the variable Tenure is 6.06, with a standard deviation of 5.2, revealing low variability in Tenure Similarly, the variable Age has an average value of 50.038 with a standard deviation of 7.839 Additionally, the youngest CEO is 25 years old, while the oldest is 86 years old
Regarding the control variables, firm size (Size) has an average value of 9.5, and firm age (Fage) has an average value of 22.367.
Correlation analysis
The correlation matrix between the independent and control variables in the sample is shown in Table 4.2 The correlation coefficients are all less than 0.8 (the largest is 0.56) Hence, it can be assumed that the phenomenon of multicollinearity is not serious The table reveals a positive correlation between CEO characteristics (duality, age, gender, ownership, tenure) and Cash holdings, but a negative correlation with Leverage Similarly, the results show that CEO education has a negative relationship with Cash but a positive one with Leverage These results emphasize the intricate interplay between CEO characteristics and corporate financial policy, underscoring the necessity of a sophisticated comprehension of these connections within corporate governance
Table 4.2: Correlation coefficients between measures of CEO characteristics and financial policy
Table 4.3: The effect of CEO characteristics financial policy—Pooled OLS regression z-statistics in parentheses
• Cash = 0.196 + 0.005*Dual + 0.001*Age - 0.017*Edu + 0.014*Gen - 0.0005*Own
• Leverage = 0.152 - 0.006*Dual - 0.004*Age + 0.029*Edu - 0.089*Gen - 0.002*Own
As presented in Table 4.3, dual has no significant effect at all The analysis reveals a negative association between CEO age and financial leverage, with an estimated coefficient of −0.006 and statistical significance at the 1% level This finding aligns with the hypothesized inverse relationship between CEO age and financial leverage Similar outcomes have been documented in previous studies conducted by Nguyen Minh Ha et al (2021), S Shazlin et al (2020), and Irene Wei Kiong Ting et al (2015) Younger CEOs exhibit a higher propensity for risk-taking, stemming from their confidence in employing financial leverage to generate maximum profits for their companies In contrast, older CEOs tend to adopt a more risk-averse approach
Diverging from the negative association between CEO age and leverage, the positive correlation between CEO age and cash holdings, supported by an estimated coefficient of 0.001 and statistical significance at the 5% level, highlights the potential for increased risk aversion among older CEOs Holding a substantial cash reserve provides a protective cushion against unforeseen events and bolsters the company's financial stability As retirement looms, older CEOs may prioritize the preservation of existing assets and the maintenance of a robust financial position Additionally, a more conservative financial policy, often embraced by older CEOs, could motivate them to maintain larger cash balances as a safeguard against potential risks
A significant positive coefficient of 0.029, accompanied by statistical significance at the 5% level, for CEO education, reveals a propensity among CEOs with economics-related degrees to actively employ financial leverage, resulting in higher corporate debt ratios This finding resonates with prior research, as evidenced by Nguyen Minh Ha et al (2021), MeiShan Chua et al (2020), and Irene Wei Kiong Ting et al (2015), suggesting that highly educated CEOs exhibit reduced risk aversion and a greater openness to innovative investment ideas and opportunities CEO education emerges as a pivotal factor in shaping corporate policy Additionally, the immersion in rigorous academic environments likely cultivates in these CEOs a heightened boldness in utilizing financial leverage
Diverging from the earlier discourse, CEO education demonstrates a negative association with cash holdings and has an estimated coefficient of -0.017 with a significance level of 5% This finding implies that a background in finance and economics may instill in CEOs a more profound comprehension of risk management and financial instruments This enhanced knowledge could foster a greater inclination toward employing debt financing (leverage) to support investments and growth strategies Consequently, these CEOs may maintain lower cash reserves, as they place a greater degree of reliance on borrowed funds
Embedded within the pooled regression results, CEO gender has an estimated coefficient of -0.089, accompanied by statistical significance at the 1% level This compelling finding unveils a proclivity among male CEOs to utilize debt more extensively in comparison to their female counterparts Delving into the realm of psychology and cognitive management, research has consistently demonstrated that men and women exhibit distinct leadership styles, company performance, communication skills, conservatism, boldness, and risk aversion (Thanh & Hà, 2021) These inherent gender-based characteristics can manifest in discernible differences between male and female CEOs' financial decisions Female executives consistently gravitate towards a lower debt composition within their companies' capital structures Previous studies conducted by Lisa Schopohl et al (2021) and Irene Wei Kiong Ting et al (2015) have yielded concordant findings The regression results emanating from the Vietnamese market underscore a tendency among male CEOs to exhibit greater risk tolerance, assertiveness, and confidence, leading them to employ financial leverage to a more substantial extent in their business operations
The estimated coefficient of -0.002 for CEO ownership, accompanied by statistical significance at the 5% level, indicates a negative impact of CEO ownership on corporate leverage This finding aligns with prior research, as evidenced by Timo Korkeamọki et al (2017), suggesting that CEOs with substantial ownership stakes in a company prioritize safeguarding their personal wealth over pursuing aggressive growth strategies This inclination could lead them to avoid debt financing for risky investments, opting for a more prudent financial approach characterized by lower leverage Moreover, when CEOs hold a significant portion of the company's equity, their interests may diverge from those of external shareholders They might be less inclined to utilize debt if it increases the risk of financial distress and potential loss of their ownership stake Consequently, they may focus more on ensuring the company's long-term stability, prioritizing financial strength and avoiding excessive debt, even if this means sacrificing short-term growth opportunities
CEO tenure with a coefficient is at -0.003 and a statistical significance level of 1%, indicates a negative impact of CEO tenure on corporate leverage This finding aligns with prior research, as evidenced by S Shazlin et al (2020) and Pascal Nguyen et al (2017), suggesting that CEOs who have held their positions for an extended period may develop a sense of entrenchment and overconfidence in their decision-making abilities This inclination could lead them to underestimate the risks associated with debt and utilize excessive leverage, potentially jeopardizing the company's financial health
The estimated coefficient of -0.001 for CEO tenure, accompanied by statistical significance at the 10% level, indicates a negative impact of CEO tenure on corporate leverage This finding aligns with prior research, suggesting that CEOs who have held their positions for an extended period may develop a sense of entrenchment and overconfidence in their decision-making abilities This inclination could lead them to underestimate the risks associated with debt and utilize excessive leverage, potentially jeopardizing the company's financial health
In addition to the independent and dependent variables in the model, several control variables were incorporated, including firm size (Size) and firm age (Fage) Size exhibits a positive correlation with financial leverage, with an estimated coefficient of 0.067 at a significance level of 1% Vietnamese listed companies favor utilizing retained earnings over-borrowing Both firm size and total asset growth rate demonstrate a positive correlation with business leverage at a significance level of 1% Conversely, Size and Fage display a negative correlation with cash, with estimated coefficients of -0.015 and -0.0008, respectively, both at a significance level of 1%.
Conclusion & Recommendations
Conclusion
The study was conducted to evaluate CEO characteristics on the financial policy of 100 companies listed on the Ho Chi Minh Stock Exchange (HoSE) between 2010 and 2022 In this study, the financial policy is measured by Cash holding and Leverage indicators Using a quantitative approach with Pooled OLS regression, the results show that the factor CEO duality (Dual) has no impact on cash and leverage CEO age (Age) has a positive effect on Cash but a negative effect on Leverage Furthermore, CEO Gender (Gen) and CEO Ownership (Own) has a negative effect on Leverage but do not affect Cash Higher CEO ownership (Own) leads to less debt (negative impact) but doesn't affect cash holdings CEO tenure (Tenure) has a negative impact on Cash and Leverage
The research results show that CEO duality does not significantly impact either cash holdings (Cash) or financial leverage (Leverage) This implies that the combined roles do not alter the CEO's approach to financial decisions
CEO Age indicates that older CEOs tend to maintain higher cash reserves This may reflect a more cautious approach to risk management or a focus on long-term stability Conversely, age shows a negative correlation with leverage, suggesting that older CEOs may be more conservative in utilizing debt financing
Gender has a negative impact on leverage, indicating that female CEOs tend to employ lower levels of debt financing compared to their male counterparts This could be attributed to different risk preferences or leadership styles However, gender does not significantly affect cash holdings
The CEO's ownership stake (Own) demonstrates a negative correlation with leverage, implying that CEOs with a higher personal investment in the company may be more inclined to limit debt usage This could stem from a desire to protect their personal wealth or a focus on long-term shareholder value Again, the ownership does not significantly impact cash holdings
Tenure exhibits a negative correlation with both cash holdings and leverage This suggests that CEOs with longer tenures tend to maintain lower cash reserves and employ higher levels of debt financing This could be attributed to increased confidence in the company's prospects or a desire to accelerate growth.
Recommendations
The findings indicate that duality, age, education, gender, ownership, and tenure play a crucial role in shaping corporate financial policy, specifically related to cash holdings and leverage These profound insights hold significant value for various stakeholders, including businesses, investors, and governments Notably, they can provide valuable understanding to shareholders by aiding them in making informed decisions when selecting a CEO to lead the company By recognizing the impact of CEO characteristics (such as duality, age, education, gender, ownership, and tenure) on financial policy (including cash holdings and leverage), investors can leverage the discoveries from this research to gain deeper insights into how CEO attributes influence financial profiles and investment potential of the firm Evaluating these characteristics allows investors to make more prudent investment decisions aligned with their investment goals and risk tolerance Furthermore, this research can furnish governments with information on these factors, enabling them to formulate policies and legal frameworks related to corporate governance, financial stability, and investor protection, thereby promoting sound financial activities and safeguarding the interests of investors and the broader economy.
Limitations
While this research offers valuable insights into the intricate interplay between CEO characteristics and financial policy, it is crucial to acknowledge its limitations The focus on specific CEO traits (duality, age, education, gender, ownership, tenure) and their impact on particular financial policies (cash holdings, financial leverage) of VN 100 companies raises concerns about the generalizability of the findings to companies, financial policies, and CEO characteristics beyond the scope of the study Future research with a larger and more diverse sample could provide a more comprehensive understanding of the nuances of how CEO characteristics influence corporate financial policy
VN 100 : The 100 Most Capitalized, Liquid, and Freely Tradable Stocks on the HoSE
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