Investigating the Nonlinear Relationship between CEO Power and Capital Structure

Nowadays in the world of business, one of the issues that companies are facing is making decision about capital structure. After the Industrial Revolution, separation of owners and management in the companies was raised. This issue reflects the importance of managerial power as the source of important decisions in choosing the appropriate capital structure. This paper investigates the nonlinear power of CEO and capital structure of 100 companies accepted in Tehran Stock Exchange during the period of 2011-2011 based on the agency theory. The power index of the CEO has been constructed through the principle component analysis. The three dimensions of CEO power (Expert Power, Ownership Power and Referent Power) are considered as constructing the variable of executive power. We used econometric approach and panel data models in testing the hypothesis. The result of this paper showed that there is a parabola- shape association between CEO power and leverage; meaning that there is a nonlinearity relationship between these two variables.