stock exchange
Shokrollah Khajavi; Soraya Weysihesar
Abstract
Efficiency is one of the most important criteria that investors consider when evaluating influencing factors to identify suitable investment opportunities. Since managers play an effective role in company decisions, they may deviate from optimal investment choices. Therefore, the purpose of this research ...
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Efficiency is one of the most important criteria that investors consider when evaluating influencing factors to identify suitable investment opportunities. Since managers play an effective role in company decisions, they may deviate from optimal investment choices. Therefore, the purpose of this research is to investigate the relationship between CEO power and overinvestment. In this regard, 123 companies listed on the Tehran Stock Exchange were examined between 2016 and 2022. The results show that there is a negative and significant relationship between CEO power and investment inefficiency (overinvestment). Furthermore, this relationship is not nonlinear. The findings indicate that powerful CEOs do not engage in excessive investments that could create more personal benefits for them. Indeed, because of risk aversion and ability effects, the private benefits of powerful CEOs are aligned with shareholders’ interests, making them less likely to overinvestIntroductionEfficiency is one of the most important criteria that investors consider when evaluating influencing factors to identify suitable investment opportunities. Since managers play an effective role in company decisions, they may deviate from optimal investment choices. Therefore, the purpose of this research is to investigate the relationship between CEO power and overinvestment. To explain this relationship, three different effects are discussed: the discretion effect, the risk aversion effect, and the ability effect.Under the discretion effect, CEO power is positively related to overinvestment, because powerful CEOs have more freedom of action and may use overinvestment decisions to create personal benefits. Through empire building and expropriation, they pursue self-interest that can increase their rewards, wealth associated with stock ownership, and job security because they control capital allocation. Furthermore, CEOs can create personal bonuses through overinvestment because they influence the choice of performance measures associated with their bonuses. Under the risk aversion effect, CEO power has a negative relationship with overinvestment, because powerful CEOs are more risk-averse than shareholders who can reduce their risk through diversified portfolios. Overinvestment may increase the risk of the company. Since most of the CEO's rewards and human capital depend on their company, it is difficult for them to diversify work and wealth risks. Therefore, powerful CEOs who do not diversify and are often considered the main planners of the company's long-term strategy are more likely to make investments based on risk aversion. As a result, they are less likely to overinvest. Under the ability effect, powerful CEOs with greater management ability can make investment decisions more effectively and efficiently, and therefore are less likely to overinvest. CEOs with stronger expertise can better manage the company's external uncertainties through their experience and knowledge. Hence, powerful CEOs make more efficient investment decisions. Accordingly, the main goal of this research is to investigate the effect of CEO power on overinvestment. From the perspective of economic studies, weak supervision over CEOs, in the shadow of weak management structures and opportunities to secure personal benefits, can encourage powerful managers to choose projects with a negative net present value (NPV), thereby reducing company value. On the other hand, greater CEO power leads to more appropriate investment in valuable projects and greater investment efficiency. Factors such as risk aversion, motivation to maintain reputation and credibility, and stronger management abilities make powerful managers perform better in evaluating investment opportunities and increase investment efficiency, which aligns with organizational research. Research QuestionAccording to the research objective, this study seeks to answer the question of whether CEOs with higher decision-making power overinvest. MethodsThe current research is of an applied type; in terms of its goal, it is analytical, quasi-experimental, and correlational. From the time dimension of the data, it is retrospective and post-event. In line with the purpose of the research, 123 companies listed on the Tehran Stock Exchange were examined between 2016 and 2022. The residuals of Richardson's (2006) model were used to measure overinvestment. CEO power was measured using the principal component analysis method and the criteria of CEO duality, the percentage of independent directors on the board of directors, CEO tenure, and CEO ownership percentage. The information required to measure the variables and test the research hypotheses was extracted from the Rahavard Novin database, audited financial statements, and other reports published on company websites, Codal, and the Stock Exchange Organization. After data collection, Excel software was used for summarizing and calculations. Since the dependent variable, overinvestment, is not continuous and has only one of the two values (zero and one), the logistic regression (logit) model was used to test the research hypothesis with this variable. In addition, a multiple regression model was used to test the research hypothesis with the investment inefficiency variable. Finally, the analysis was performed using EViews software. ResultsThe results show that as CEO power increases, investment inefficiency (overinvestment) decreases. In addition, there is no significant nonlinear relationship between CEO power and investment inefficiency (overinvestment). Discussion and ConclusionThe findings of the research show that powerful CEOs, who have more authority than shareholders in making company decisions, do not engage in excessive investments that could create personal benefits for them. Indeed, because of the risk aversion and ability effects, the private benefits of powerful CEOs are naturally aligned with shareholders’ interests, making them less likely to overinvest. Under the risk aversion effect, since most of a CEO's rewards and human capital depend on their company, it is difficult for them to diversify work and wealth risks. Therefore, powerful CEOs who do not diversify and are often considered the main planners of the company's long-term strategy are more likely to make investments based on risk aversion. As a result, they are less likely to overinvest. Under the ability effect, powerful CEOs have higher management abilities and therefore make more efficient investment decisions. Because strong CEOs with greater managerial ability possess better knowledge and judgment than their peers, making them more capable of predicting future changes, they do not waste capital on negative NPV projects. Therefore, more powerful CEOs are less likely to overinvest. These results are in line with Lo and Shiah‑Hou's (2022) research and are also consistent with organizational theory. According to this theory, the greater the power of the CEO, the more appropriate the investment in valuable projects and the greater the investment efficiency. Factors such as managers' risk aversion, motivation to maintain reputation, and stronger management abilities lead powerful managers to use better strategies for the optimal use of company resources, thereby increasing transparency and securing the interests of all stakeholder groups. Therefore, powerful CEOs make more efficient investment decisions.
Accounting and various aspects of finance
shokrollah khajavi; soraya weysihesar
Abstract
Dividend policy is one of the most important topics in financial literature. CEOs with a high level of authority are motivated to use dividends payout as a strategy to build a reputation in capital markets, aiming to obtain external financing on favorable terms. However, the expected net value of such ...
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Dividend policy is one of the most important topics in financial literature. CEOs with a high level of authority are motivated to use dividends payout as a strategy to build a reputation in capital markets, aiming to obtain external financing on favorable terms. However, the expected net value of such a reputation depends on the likelihood of external financing, which is associated with low profitability and high volatility of cash flows. Therefore, this study aims to investigate the effect of CEO authority on the dividends payout probability in the conditions of low profitability and high volatility of cash flow. In doing so, 128 companies listed on the Tehran Stock Exchange were examined from 2014 to 2021. The results show that the CEO authority has a negative and significant effect on the payment and increase of dividends. Furthermore, low profitability and high volatility of cash flow increase the negative effect of the CEO's authority on the increase of dividends. However, this factor does not have a significant moderating effect on the relationship between CEO authority and dividends payout. Additionally, financial limitations do not have a significant moderating effect on the relationship between CEO authority and payment and increase of dividends. IntroductionThe decision to pay dividends represents one of the most critical choices for managers. The theoretical foundation linking the CEO's behavior and the company's dividend payment is grounded in agency theory. Agency theory suggests that managers, who have control over the company's cash flows, might prioritize their own interests over distributing cash to shareholders. Paying dividends to shareholders diminishes the resources under managers' control, and consequently, reduces their power. Additionally, paying dividends heightens the likelihood of capital market scrutiny on the company, as it often leads to an increased probability of sourcing external financing for investment projects. Financing projects internally circumvents this oversight and the risk that funds may not be accessible or may only be available at high costs. Therefore, agency theory predicts that managers have incentives to portray financial weakness, thereby justifying their decisions not to pay or increase dividends. On the other hand, there are instances where a company's cash flow may be uncertain, such as when the company experiences low profitability and high volatility of cash flow. These two increase the probability of using external financing and are not influenced by powerful CEOs. Therefore, the uncertainty in cash flow overshadows the decisions related to dividends. This is attributed to the fact that powerful CEOs often have greater concerns regarding credit and reputation. Investors often view CEO power as indicative of a greater misalignment between managerial and shareholder interests, signaling weak internal governance and heightened risk of entrenchment or expropriation. Therefore, to provide funds to companies managed by powerful CEOs, investors demand higher returns, which results in an increase in the cost of external financing. Research indicates that powerful CEOs, akin to managers of firms with weak governance structures, encounter higher costs when raising external financing. Furthermore, when anticipating an increase in the need for external funds, these CEOs have a stronger incentive to mitigate reputational concerns by paying dividends. Therefore, powerful CEOs are more likely to pay dividends to invest in reputation, particularly in scenarios of lower profitability and higher cash flow volatility. Based on these considerations, the purpose of this research is to investigate the effect of CEO power on the probability of paying dividends under conditions of low profitability and high volatility of cash flow. Research Questions or HypothesisIn line with the research’s objective, this study seeks to answer the question: Does CEO power affect the probability of paying dividends? Also, do low profitability and high volatility of cash flow have a moderating effect on the relationship between CEO power and the probability of paying dividends? MethodsThe statistical population of this study comprises companies listed on the Tehran Stock Exchange. The research hypotheses were tested on 128 companies over an eight-year period from 2014 to 2021, using multiple regression model and logistic regression. The data necessary for measuring the variables and testing the research hypotheses were primarily sourced from the Rahavard Novin software, audited financial statements, and other reports available on the companies’ websites, Codal and the Securities and Exchange Organization. ResultsThe results show that the power of the CEO has a negative and significant effect on the payment and increase of dividends. Additionally, conditions of low profitability and high volatility of cash flow further amplify the negative effect of the CEO power on the increase of dividends. However, these conditions do not have a significant moderating effect on the relationship between the CEO power and the payment of dividends. Similarly, financial constraints do not have a significant moderating effect on the relationship between the CEO power and the payment and increase of dividends. Discussion and ConclusionThe negative effect of the CEO power on the payment and increase of dividends is in line with agency theory. This theory posits that managers, who have control over the company’s cash flows, might prioritize their own interests over distributing cash to shareholders. Paying dividends to shareholders diminishes the resources under managers' control, and consequently, reduces their power. Additionally, paying dividends heightens the likelihood of capital market scrutiny on the company. Therefore, managers may prefer to present a picture of financial weakness, leading them to be less inclined to pay dividends. The research also revealed that while financial constraints, as well as the combined effect of low profitability and high volatility of cash flow, have a negative and significant relationship with the payment and increase of dividends, financial constraints do not significantly moderate the relationship between CEO power and the payment and increase of dividends. Furthermore, low profitability and high volatility of cash flow do not have a significant moderating effect on the relationship between CEO power and the payment of dividends. However, they do exacerbate the negative effect of CEO power on the increase of dividends. The findings align with the signaling theory of dividend policy. The Information content or signaling theory predicts that in a signaling equilibrium, where a reduction in dividends is associated with a decrease in shareholder wealth, managers are motivated to avoid such outcomes. Therefore, they choose a dividend policy where the declared dividend is lower than the expected dividend. This approach allows them to maintain consistent cash dividend even if subsequent cash flows turn out to be lower than expected. This consideration leads to the prediction that when future cash flow is highly volatile, the dividend payout ratio will be lower. In fact, this implies that when facing uncertainty in cash flow, companies prefer to maintain a low dividend ratio due to the dividend signaling property. They aim to avoid the subsequent losses of dividend cuts, as reducing dividends may lead to a significant drop in the company’s value. The absence of a significant impact from financial constraints and the interaction of low profitability and high volatility of cash flow on the decisions of powerful CEOs to pay dividends indicates that managers likely weigh other factors when determining dividends. Additionally, the need to maintain and build the reputation of powerful CEOs does not depend on paying dividends.
shokrollah khajavi; Hashem Nasirifar; Mohammad-Hossein Ghadirian-Arani
Abstract
Due to the benefits of political connections and the lower necessity of responding to market pressures to increase information quality by politically connected firms, it is expected that these firms will provide low-quality accounting information. With respect to the extended role of government in the ...
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Due to the benefits of political connections and the lower necessity of responding to market pressures to increase information quality by politically connected firms, it is expected that these firms will provide low-quality accounting information. With respect to the extended role of government in the economy of Iran, this study aims to investigate the impact of political connections on the accounting information quality of the firms listed in the Tehran Stock Exchange (TSE). The statistical sample includes 101 listed firms over the 2010-2018 period. Financial restatement and the intensity of financial restatement are used as indicators of the low quality of accounting information. To achieve the research objectives, two hypotheses have been proposed, and to test the hypotheses, the logistic regression and the multiple linear regression analysis in a panel data model were conducted. The results show that political connections have a positive effect on the occurrence and the intensity of financial restatement. Therefore, it seems that the firms' accounting information quality is affected by their political connections.
Sh. Khajavi; M. Sayrani; A. Allahyari
Volume 8, Issue 30 , July 2010, , Pages 151-177
Abstract
This study aims at investigating the feasibility of the application of "Balanced Scorecard", in performance measurement of Shiraz hospitals. Balanced Scorecard is one of the management accounting techniques which was first introduced by Robert Kaplan and David Norton in 1992. This technique organized ...
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This study aims at investigating the feasibility of the application of "Balanced Scorecard", in performance measurement of Shiraz hospitals. Balanced Scorecard is one of the management accounting techniques which was first introduced by Robert Kaplan and David Norton in 1992. This technique organized in four distinct prospective: financial, customer, internal processes and learning and growth. Four prospective related to balanced scorecard were analyzed based on one main hypothesis and four subsidiaries. The gained results of Statistical analysis showed that indicating in all prospective of Balanced Scorecard in Shiraz hospitals is possible, but yet pre required and needed thought to implementing this technique in Shiraz hospitals is not done well. We found out through more surveys that customer prospective was the most noticeable prospective and internal processes, financial and learning and growth prospective were ranked respectively.
