Impact of CEO Characteristics on Financial Conservatism of a Firm: Moderating Role of Macro-Economic Variables

Abstract

The purpose of this thesis is to examine the impact of CEO characteristics on Financial Conservatism, the moderating role of GDP Growth, and Interest Rate Spread. Financial Conservatism means a firm that is holding both high in cash holdings (cash conservative) and low in debt (debt conservative). 139 listed non-financial firm’s annual data, ranging from 2008 to 2017, is extracted from annual reports. The CEO characteristics consisting of CEO Age, CEO Duality, CEO Gender, CEO Tenure, and CEO Ownership are used as independent variables. GDP Growth and Interest Rate Spread are used as moderating variables and leverage is used as the control variable. The dependent variable is Financial Conservatism which is measured with net to debt ratio. The extracted figures are processed using panel data regression analysis under random effect assumptions. We use a logistic regression model for testing the hypothesis. The result shows that CEO Age and Tenure are linked with Financial Conservatism. The moderating effect of GDP Growth is negatively significant and Interest Rate Spread has a positive impact on Financial Conservatism (FC). Evidence shows that CEO Duality and Gender are not linked with Financial Conservatism. The moderating effect of GDP Growth is positively significant with CEO Duality and positively insignificant with CEO Gender but Interest Rate Spread has no relationship with Financial Conservatism. The additional analysis shows that CEO Ownership is negatively insignificant and linked with Financial Conservatism whereas GDP Growth is negatively significant but Interest Rate Spread moderates the link with Financial Conservatism. The current study encourages the benefit of industrial improvement by retaining the best mechanism in corporate governance. Thus, this study is beneficial for firms’ owners, managers, and investors, as Financial Conservatism firms are more cost-effective, low-risk investments and pay higher dividends than their non-conservative equivalents.