Managerial Entrenchment and Capital Structure: Evidence from Norway

Abstract

In this thesis, we investigate the relationship between CEO entrenchment and capital structure, an area with limited prior research in a Norwegian context. For the purpose of this study, we define entrenchment as the degree to which CEOs are insulated from the full scope of corporate governance and control mechanisms. This includes equity-based compensation incentives, board monitoring, and the presence of large share blockholders. We also consider age and tenure as relevant CEO characteristics. To conduct our analysis, we have assembled a unique dataset manually collected from annual reports and financial statements covering the years 2015-2022.

Our empirical results indicate that entrenched CEOs, identified by lower equity ownership, higher fixed compensation, less stringent monitoring mechanisms (e.g., larger boards and absence of large share blockholders), and longer tenures, are generally associated with lower levels of leverage. Additionally, we find that older CEOs with longer tenures, higher fixed compensation, and lower equity ownership are more likely to implement zero- or almost zero-leverage policies.