The “leisure theory” is that CEOs are too busy driving their fancy cars or cruising on their yachts to bother with constant details at the office. Toys can be distracting. And while CEOs may think they can run the company just as well from the Feadship , oftentimes they can’t.
The other explanation is the “lifestyle” theory. A CEO who needs large wealth and income to sustain his personal spending might place huge demands on the company for growth and profits. Sometimes those demands might be unrealistic, causing the CFO or others to push the envelope when it comes to reporting or accounting standards.
Mr. Davidson said it’s easier to explain why companies run by “frugals” – CEOs who don’t buy luxury toys – tend to stay out of trouble.
“We find that if people carefully monitor their own spending and are restrained in their own decision making, they will do the same on the job,” he said. "They tend to run a very tight ship."
Warren Buffett would certainly agree.
Why do you think companies run by free-spending CEOs tend to get into trouble more?
-By CNBC's Robert FrankFollow Robert Frank on Twitter: @robtfrankPage 3 of 3 | Prev Page