Powerful CEOs, debt financing, and leasing in Chinese SMEs: Evidence from threshold model

This study investigates the impacts of CEO power on firm financing policies (i.e. debt financing and operating leasing) using the Caner and Hansen (2004) instrumental variable threshold regressions approach. The sample consists of a panel of 297 Chinese listed small and medium sized enterprises (SMEs) over the period 2009-2012. The empirical results indicate that there are threshold effects in the CEO power-debt relationship and CEO power-operating lease relationship. In particular, we find that firms tend to use more debt financing (and operating leasing) when CEO power index below a certain threshold level; beyond the threshold level, CEO tends to manipulate firm capital structure to pursue their own interests, thus using less debt financing and operating leasing. In addition, our estimation results suggest a positive relationship between debt and operating leases when CEO power is smaller than certain threshold, while it becomes negative if the power index exceeds the threshold level.