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ABSTRACT
This research examines the effect of CEOs’ ability concerning their debt maturity choice. Examining public firms over the period 1997–2016 in Taiwan, we find that high-ability managers choose short-term debt financing to signal their ability. We adopt the rollover risk channel to prove that managers signal their ability on the use of short-term debt are only from their intention. In addition, we consider the separation of ownership and control as well as information opacity, which could force managers to have a greater incentive to use short-term debt for signaling their ability to align the managers-shareholders conflict and maintain their reputation, compensation, and bonus from being affected by information opacity.
Disclosure statement
No potential conflict of interest was reported by the author.
Notes
1. In particular, the sensitivity of CEO compensation to stock price (i.e. delta) negatively relates to short-term debt, and the sensitivity of CEO compensation to stock volatility (i.e. vega) positively relates to short-term debt.
2. We compute that the proportion of family-controlled firms among all firms from our sample period is around 62%. Particularly, the highest proportion (69%) is in 1997, and the lowest proportions are in 2007, 2008, and 2009 (60%). More detailed statistics are available from the authors upon request.
3. Managerial characteristics have been measured in different ways, such as managerial entrenchment (Shleifer and Vishny Citation1989), managerial reputation (Milbourn Citation2003), managerial overconfidence (Malmendier and Tate Citation2005), managerial quality (Bloom and Van Reenen Citation2007), and CEOs’ ability (Demerjian, Lev, and McVay Citation2012).
4. As to firms’ credit quality, we compute each firm’s Z-score instead of using a credit rating, because TEJ only provides information on credit ratings up to 2013.
5. Appendix A provides more detailed information on the control variables.
6. Huang, Tan, and Faff (Citation2016) also use industry fixed effect to investigate CEO overconfidence and corporate debt maturity. All independent variables are lagged by one year to alleviate issues related to endogeneity.
7. The predicted sign of Mtb on debt maturity is negative, and the regression result has a positive relation with debt maturity, which is consistent with Datta, Iskandar‐Datta, and Raman (Citation2005).
8. The high correlation (0.934) between Long-Term Debt/Total Debt and Long-Term Debt/Total Assets also indicates that Long-Term Debt/Total Assets is a good proxy for debt maturity. The directions between control variables and debt maturity measure are mostly consistent with our expectations. We also confirm that firm characteristics are not highly correlated with each other, thus ensuring that our regression results are not subject to collinearity problems. The correlation between Z-score and Mtb is around 0.692. When we put each of them or both of them in our regression, the results are still unchanged.
9. The debt maturity-signaling theory has long argued that a ‘firm’ chooses debt with various lengths of maturity to signal firm quality (Flannery Citation1986; Diamond Citation1991), in which both low-quality firms and high-quality firms choose to issue short-term debt, while medium-quality firms issue long-term debt.
10. Estimates for the other quantiles are available upon request from the authors.
11. The results of cross-sectional analysis are requested upon authors.
12. Separation of ownership and control is equal to 1 if the voting rights of the controlling shareholders are higher than the cash-flow rights and otherwise 0.
13. CEOs with high abilities are expected to make good investments, which should help decrease a firm’s credit risk and enable it to obtain more short-term debt. However, the relationship between managerial ability and investment could vary across firms based on specific circumstances and time periods (see Holcomb, Holmes Jr., and Connelly Citation2009; Cornaggia, Krishnan, and Wang Citation2017; Andreou et al. Citation2017). There are two different viewpoints that explain the relations among managerial ability, investment, and short-term debt financing, and we cannot completely rule out this alternative explanation.
14. Bui et al. (Citation2018) set up managerial ability by the percentage of population holding a college degree in the state where a given firm is headquartered (college degree). In this study, we use CEOs’ education level, divided into PhD, Master, bachelor, and below college, as the instrumental variable.
15. We also use panel data with firm fixed effect and time fixed effect to do the empirical results again (results are requested upon authors). The results are still consistent with the main findings that managers tend to use short-term debt to signal their abilities.
16. The PSM results are requested upon authors.