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Does CEO reputation matter for capital investments?

Authors
Journal
Journal of Corporate Finance
0929-1199
Publisher
Elsevier
Publication Date
Volume
17
Issue
4
Identifiers
DOI: 10.1016/j.jcorpfin.2011.04.004
Keywords
  • Ceo Reputation
  • Agency Costs
  • Capital Expenditure
Disciplines
  • Economics

Abstract

Abstract This paper examines the association between CEO reputation and corporate capital investments. The efficient contracting hypothesis predicts a positive association between CEO reputation and wealth effects of corporate capital investments. In contrast, the rent extraction hypothesis predicts that the wealth effects of capital investments are negatively associated with CEO reputation. We find that the stock market's responses to announcements of capital investments are more favorable for firms with more reputable CEOs. Moreover, CEO reputation mitigates the negative stock price reaction associated with announcements of capital investments by firms with high free cash flow and low growth opportunities. Additional analysis indicates that firms with more reputable CEOs exhibit significantly better post-investment operating performance improvements than those with less reputable CEOs, especially in firms with high free cash flow and low growth opportunities. Collectively, our results suggest that the efficient contracting hypothesis dominates the rent extraction hypothesis in terms of net economic impact of capital investments on the investing firm.

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