We examine whether managerial political ideologies and their associated views on risk and taxes affect how CEOs perceive the benefits and costs of debt and, subsequently, leverage choices. By exploiting a unique framework that separates CEO leverage choices based on risk and tax considerations, we find partisan Democrat CEOs in under-leveraged firms take 2.8 years longer than non-partisan CEOs to adjust to optimal leverage ratios. The extended period of adjustment represents an agency cost to shareholders, as under-leveraged firms miss out on tax benefits of debt. Using the 2017 Tax Cut and Jobs Act (TCJA) as an exogenous shock to demand for corporate debt, we show under-leveraged firms with partisan Democrat CEOs delay target leverage adjustment by 15%. Lastly, evidence suggests that high CEOs' compensation incentives and better board monitoring can significantly reduce agency costs.​

JEL classification: G21, G24, E44, G28

Keywords: Agency costs, CEO, political ideology, costs of capital, target leverage ratio, capital structure, Democrat, Republican, Tax Cut and Jobs Act.