Open Access Journal Article

CEO power, corporate governance, and firm leverage

by Shahbaz Sheikh a,* orcid
DAN Department of Management & Organizational Studies, The University of Western Ontario, London, Ontario, Canada
Author to whom correspondence should be addressed.
JEA  2024, 74; 3(3), 74;
Received: 15 August 2023 / Accepted: 18 September 2023 / Published Online: 15 September 2024


This study empirically examines the effect of corporate governance on the relation between CEO power and firm leverage. Results from OLS and industry fixed effects regressions show that CEO power is positively associated with firm leverage. However, this association is driven by the strength of corporate governance as powerful CEOs tend to choose higher levels of debt only when corporate governance is strong. When corporate governance is weak, CEO power does not seem to have any effect on firm leverage. Overall, results indicate that strong corporate governance mitigates the severity of manager-shareholder conflicts and induces powerful CEOs to choose higher leverage.

Copyright: © 2024 by Sheikh. This is an open-access article distributed under the terms of the Creative Commons Attribution License (CC BY) (Creative Commons Attribution 4.0 International License). The use, distribution or reproduction in other forums is permitted, provided the original author(s) or licensor are credited and that the original publication in this journal is cited, in accordance with accepted academic practice. No use, distribution or reproduction is permitted which does not comply with these terms.

Share and Cite

ACS Style
Sheikh, S. CEO power, corporate governance, and firm leverage. Journal of Economic Analysis, 2024, 3, 74.
AMA Style
Sheikh S. CEO power, corporate governance, and firm leverage. Journal of Economic Analysis; 2024, 3(3):74.
Chicago/Turabian Style
Sheikh, Shahbaz 2024. "CEO power, corporate governance, and firm leverage" Journal of Economic Analysis 3, no.3:74.
APA style
Sheikh, S. (2024). CEO power, corporate governance, and firm leverage. Journal of Economic Analysis, 3(3), 74.

Article Metrics

Article Access Statistics


  1. Adams, R.B., Almeida, H., & Ferreira, D. (2005). Powerful CEOs and their impact on corporate performance. Review of Financial Studies, 18, 1403–1432.
  2. Agrawal, A. & Knoeber, C.R. (1996). Firm performance and mechanisms to control agency problems between managers and shareholders. Journal of Financial Quantitative Analysis, 31(3), 377-397.
  3. Amihud, Y. & Lev, B. (1981). Risk reduction as a managerial motive for conglomerate mergers. The Bell Journal of Economics, 12, 605–617.
  4. Bathala, C., Moon, K., & Rao, R. (1994). Managerial ownership, debt policy and institutional holdings: An agency perspective. Financial Management, 23(3), 38-50.
  5. Baum, C.F., Schaffer, M.E., & Stillman, S. (2003). Instrumental variables and GMM: Estimation and testing. The Stata Journal, 3 (1), 1-31.
  6. Bebchuk, L., Cohen A. & Ferrell, A. (2009). What matters in corporate governance?” Review of Financial Studies, 22, 783–827.
  7. Bebchuk, L., Cremers, K.J.M., & Peyer, U.C. (2011). The CEO pay slice. Journal of Financial Economics, 102, 199–221.
  8. Berger, P. G., Ofek, E., & Swary, I. (1996). Investor valuation and the abandonment option. Journal of Financial Economics, 42, 257–287.
  9. Brickley, J.A., Coles, J.L., & Terry, R.L. (1994). Outside directors and the adoption of poison pills. Journal of Financial Economics, 35, 371–390.
  10. Chakraborty, A., Rzakhanov, Z., & Sheikh, S. (2014). Antitakeover provisions, managerial entrenchment and firm innovation. Journal of Economics and Business, 72, 30-43.
  11. Chintrakarn, P., Jiraporn, P., & Singh, M. (2014). Powerful CEOs and capital structure decisions: Evidence from the CEO pay slice (CPS). Applied Economics Letters, 21(8), 564–568.
  12. Coles, J. L., Daniel, N. D., & Naveen, L. (2006). Managerial incentives and risk-taking. Journal of Financial Economics, 79(2), 431-468.
  13. DeAngelo, H., & Masulis, R. (1980). Optimal capital structure under corporate and personal taxation. Journal of Financial Economics, 8(1), 3-29.
  14. Degryse, H., De Geoij, P., & Kappart, P. (2012). The impact of firm and industry characteristics on small firms’ capital structure. Small Business Economics, 45, 215-244.
  15. Fahlenbrach, R. (2009). Founder-CEOs, investment decisions, and stock market performance. Journal of Financial and Quantitative Analysis, 44, 439–466.
  16. Fama, E. & Jensen, M. (1983). Separation of ownership and control. Journal of Law and Economics, 26, 301–325.
  17. Finkelstein, S. (1992). Power in top management teams: Dimensions, measurement, and validation. Academy of Management Journal, 35, 505-538.
  18. Fischer, E.O., Robert H. & Josef Z. (1989). Dynamic capital structure choice: Theory and tests, Journal of Finance, 43, 19–40.
  19. Friend, I., & Lang, L. H. (1988). An empirical test of the impact of managerial self‐interest on corporate capital structure. Journal of Finance, 43(2), 271-281.
  20. Gompers, P.A., Ishii J.L. & Metrick A. (2003). Corporate governance and equity prices. Quarterly Journal of Economics, 118(1), 107-156.
  21. Goyal, P., & Park, C.W. (2002). Board leadership structure and CEO turnover. Journal of Corporate Finance, 8(1), 49-66.
  22. Grossman, S., & Hart, O. D. (1983). An analysis of the principal-agent problem. Econometrica, 51, 7-45.
  23. Han, S., Nanda, V.K., & Silveri, S.D. (2016). CEO power and firm performance under pressure. Financial Management, 45(2), 369-400.
  24. Harris, M., & Raviv, A. (1988). Corporate control contests and capital structure. Journal of Financial Economics, 20, 55–86.
  25. Hayward, M. & Hambrick, D. 1997. Explaining the premiums paid for large acquisitions: Evidence of CEO hubris. Administrative Science Quarterly, 42: 103–127.
  26. Hermalin, B.E. & Weisbach, M.S. (1991). The effects of board composition and direct incentives on firm performance. Financial Management, 20, 101–112.
  27. Holmstrom, B. (1999). Managerial incentives problems: A dynamic perspective. The Review of Economic Studies, 66 (1), 169-182.
  28. Jensen, M. C. (1986). Agency costs of free cash flow, corporate finance, and takeovers. American Economic Review, 76, 323–29.
  29. Jensen, M.C. & Meckling W.H. (1976). Theory of the firm: managerial behavior, agency costs and ownership structure. Journal of Financial Economics, 2, 305-60.
  30. Jiraporn, P., Chintrakarn, P., & Liu, Y. (2012). Capital structure, CEO dominance, and corporate performance. Journal of Financial Services Research, 42(3), 139–158.
  31. Jiaporn, P., & Gleason, K. C. (2007). Capital structure, shareholder rights and corporate governance. Journal of Financial Research, 30(1), 21-33.
  32. Khanna, V., Kim, E. H., & Lu, Y. (2015). CEO connectedness and corporate frauds. Journal of
  33. Finance, 70: 1203–52.
  34. Lee, J., Park, J. & Park S. (2015). Revisiting CEO power and firm value. Applied Economics Letters, 22(8), 597-602.
  35. Liao, L., Mukherjee, T., & Wang, W. (2015). Corporate governance and capital structure dynamics: An empirical study. The Journal of Financial Research, 38(2), 169-191.
  36. MacKie-Mason, J. K. (1990). Do taxes affect corporate financing decisions? Journal of Finance, 45, 1471-1493.
  37. Modigliani, F., & Miller, M. (1958). The cost of capital, corporation finance and the theory of investment. American Economic Review, 48 261–297.
  38. Morellec, E., Nikolov, B., & Schurhoff, N. (2012). Corporate governance and capital structure dynamics. Journal of Finance, 67, 803–48.
  39. Morse, A., Nanda, V., & Seru, A. (2011). Are incentive contracts rigged by powerful CEOs?” Journal of Finance 66, 1779–1821.
  40. Rajan, R. & Zingalese, L. (1995). What do we know about capital structure: Some evidence from international data. Journal of Finance, 50(5), 1421-1460.
  41. Rosenstein, S. & Wyatt, J.G. (1997). Inside directors, board effectiveness, and shareholder wealth. Journal of Financial Economics, 44, 229–250.
  42. Ryan, H.E., & Wiggins, R.A. (2004). Who is in whose pocket? Director compensation, board independence, and barriers to effective monitoring. Journal of Financial Economics, 73, 497–524.
  43. Sheikh, S. (2018). CEO power, market competition and firm value. Research in International Business and Finance, 46, 373-386.
  44. Sheikh, S. (2019). CEO power and corporate risk: The impact of market competition and corporate governance. Corporate Governance: An International Review, 27(5), 358-377.
  45. Sheikh, S. (2022). CEO power and the likelihood of paying dividends: Effect of profitability and cash flow volatility. Journal of Corporate Finance. (forthcoming)
  46. Smith, C. W., & Stulz, R. M. (1985). The determinants of firms’ hedging policies. Journal of Financial and Quantitative Analysis, 20, 391-405.
  47. Stock, J. H., Wright, J. H., & Yogo, M. (2002). A survey of weak instruments and weak identification in generalized method of moments. Journal of Business and Economic Statistics, 20, 518–529.
  48. Stulz R (1988). Managerial control of voting rights: financing policies and the market for corporate control. Journal of Financial Economics, 20, 25–54.
  49. Sun, J., Ding, L., Guo, J. M., & Li, Y. (2016). Ownership, capital structure and financing decision: Evidence from the UK. The British Accounting Review, 48, 448-463.
  50. Tang, J., Crossan, M., & Rowe, W.G. (2011). Dominant CEO, deviant strategy, and extreme performance: The moderating role of a powerful board. Journal of Management Studies, 48, 1479–1503.
  51. Villalonga, B., & Amit, R. (2006). How do family ownership, control and management affect firm value? Journal of Financial Economics, 80(2), 385-417.
  52. Weisbach, M.S. (1988). Outside directors and CEO turnover. Journal of Financial Economics, 20, 431–460.
  53. Yermack, D. (1996). Higher market valuation of companies with a small board of directors. Journal of Financial Economics 40, 185–211.
  54. Zwiebel, J. (1996). Dynamic capital structure under managerial entrenchment. American Economic Review 86, 1197–1215.