Looking at a CEO’s personal finances can tell you how comfortable a company is with debt.
A new academic study found that corporations with higher levels of debt tend to have CEOs who also owe more on their own homes, according to a news release from Ohio State University.
Firms whose CEOs have home mortgages have more debt — about 4 percentage points more — than firms whose CEOs do not take out a mortgage to finance their primary personal residence, the release said.
“It’s not just the characteristics of the firm or the industry that determine a company’s debt choices. Our findings suggest that you have to also look at the personal characteristics of the CEO to fully explain these financial decisions,” Anil Makhija, co-author of the study and a finance professor at Ohio State University’s Fisher College of Business.
Makhija conducted the study with Henrik Cronqvist, professor of economics and finance at Claremont McKenna College, and Scott Yonker, a graduate student at the Fisher College.
Their study involved a sample of 1,351 CEOs. Results showed that the average CEO bought his or her home for $1.65 million in 2005 dollars. The average house was 5,180 square feet, had four bedrooms, and about 11 rooms in total, the release said.
Results showed that 67 percent of the corporate leaders used a mortgage when they purchased their home. They borrowed an average of 66 percent of the purchase price.
How the CEOs financed their homes is an indicator of their tolerance for debt, a trait that is difficult to measure otherwise, Makhija said in the release.
The researchers compared how much debt the CEOs had on their homes with how much debt the firms they led had compiled.
They found a strong positive relationship between personal and corporate debt, even after they took into account a wide variety of factors that could affect either kind of debt, the release said.
“Our study suggests that we have to also look at the personal traits of CEOs, because they can tell us important information about the financial policies of the firms they manage,” Makhija said in the release. “Past research has generally ignored these traits in explaining how firms are financed.”