The Role of Board Leadership Structure in Achieving Financial Flexibility: Evidence from an Emerging Economy

The primary objective of this study is to explore the impact of the board leadership structure (CEO duality and CEO and executives' compensation) on a firm's financial flexibility, particularly in an emerging economy context. A sample of Chinese A-Share-listed manufacturing companies was utilized for this investigation. Unbalanced panel data from 2007 to 2022, comprising 14,088 firm-year observations from the C.S.M.A.R. database, was analyzed using the statistical software STATA. The results indicate that CEO duality has a negative effect on a firm's financial flexibility, while organizations with lower-paid CEOs and executives exhibit a positive impact. Conversely, firms with highly compensated CEOs and executives show no significant effect on financial flexibility. The study also suggests that the dual role of the CEO is a consequence of weak corporate governance practices, leading to ineffective board oversight of managers. Consequently, a company's financial flexibility may suffer due to mismanagement of spending liquidity. Additionally, firms with lower-paid CEOs tend to be more conservative, risk-averse, and inclined to accumulate assets to enhance financial flexibility compared to those with highly-paid CEOs. These findings are valuable for policymakers as they offer insights into achieving financial flexibility through effective corporate governance, which is crucial for crisis management and operational continuity. Companies led by lower-paid CEOs are more likely to build up cash reserves to enhance financial flexibility compared to their counterparts.