Capital Structure Choice - Does Ceo Experience Matter on Riskier Ventures?
DOI:
https://doi.org/10.31004/jptam.v6i1.2956Keywords:
Leverage, Operational Risk, ManagementAbstract
It is stated by many that the primary driver of most debts is growth - firms borrow to grow and create shareholder value. The question is, how far should firms plunge into debt before they put too much at stake? Naturally, firms that operate in riskier ventures will not jeopardize themselves by leveraging too much. Yet on the other side of the argument, researches have pointed out that experienced CEOs are more capable of maximizing the benefits of debt. As of now, no research has pointed out what happens when CEOs worth their salt lead firms in risker ventures. Therefore, this research aims to find the causality between CEO’s experience and operational risk towards leverage ratio. Operational risk is measured using product uniqueness, a variable that is measured in previous researches as selling expenses per sales. CEO experience is defined by the length of service of a CEO in x company for y years, as long as the CEO holds any managerial role. Using time-series regression model and samples from 180 companies over 5 years, the findings explain almost 90% of the variability of leverage and firms’ risk averseness, which is derived from operational risk, is weakened with experienced CEO.
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