Does market power discipline CEO power? An agency perspective

We examine how product market competition (PMC) shapes chief executive officer's (CEO) power. Using various measures to capture both PMC and CEO power, our analyses, which include a quasi‐natural experiment, find evidence that CEOs have less power when the product market is more competitive. Furthermore, the impact of PMC on CEO power is more pronounced for firms with entrenched management, lower CEO ownership, lower analyst coverage, and for firms experiencing good ‘luck’ (windfall performance). Our results suggest that market power can act as a substitute for corporate governance in disciplining CEO power, particularly when prone to agency problems.     

CEO Compensation and Firm Performance: an Empirical Investigation of UK Panel Data

This paper examines the link between CEO pay and performance employing a unique, hand‐collected panel data set of 390 UK non‐financial firms from the FTSE All Share Index for the period 1999–2005. We include both cash (salary and bonus) and equity‐based (stock options and long‐term incentive plans) components of CEO compensation, and CEO wealth based on share holdings, stock option and stock awards holdings in our analysis. In addition, we control for a comprehensive set of corporate governance variables. The empirical results show that in comparison to the previous findings for US CEOs, pay‐performance elasticity for UK CEOs seems to be lower; pay‐performance elasticity for UK CEOs is 0.075 (0.095) for cash compensation (total direct compensation), indicating that a ten percentage increase in shareholder return corresponds to an increase of 0.75% (0.95%) in cash (total direct) compensation. We also find that both the median share holdings and stock‐based pay‐performance sensitivity are lower for UK CEOs when we compare our findings with the previous findings for US CEOs. Thus, our results suggest that corporate governance reports in the UK, such as the Greenbury Report (1995) that proposed CEO compensation be more closely linked to performance, have not been totally effective. Our findings also indicate that institutional ownership has a positive and significant influence on CEO pay‐performance sensitivity of option grants. Finally, we find that longer CEO tenure is associated with lower pay‐performance sensitivity of option grants suggesting the entrenchment effect of CEO tenure.     

The effect of financial constraints,investment policy,product market competition and corporate governance on the value of cash holdings

This study empirically investigates the value shareholders place on excess cash holdings and how shareholders’ valuation of cash holdings is associated with financial constraints, firm growth, cash‐flow uncertainty and product market competition for Australian firms from 1990 to 2007. Our results indicate that the marginal value of cash holdings to shareholders declines with larger cash holdings and higher leverage. However, firms that are more financially constrained, that have higher growth rates and that face greater uncertainty exhibit a higher marginal value of cash holdings. These findings are consistent with the explanation that excess cash holdings are not necessarily detrimental to firm value. Firms with costly external financing and that also save more cash for current operating and future investing needs find that the market values these cash hoarding policies favourably. Finally, there is limited evidence of an association between various corporate governance measures and the value of cash holdings for a shorter sample period.     

When CEOs adapt: An investigation of manager experience,policy and performance following recessions

We examine changes in corporate policies following recessions during CEO tenures to evaluate the value of learning. CEOs with recession experience demonstrate expertise in risk-shifting strategies that can contribute to higher firm value and performance during subsequent recessions. Specifically, Recession CEOs use conservative capital structure and allocation during expansions, providing excess capacity and financial slack to accumulate additional cash reserves during economic contractions, resulting in lower bankruptcy risk. As a result, Recession CEOs are equipped to raise more capital in recessions, which results in higher asset growth fueled by investments in acquisitions and capital expenditures. We also examine prior recessions and find poor performers learn to invest more and perform better in subsequent contractions. Our results are strengthened through cumulative recession experiences, when downturns are deeper, and at cyclical firms, where economic cycles are most impactful and Recession CEOs are more relevant. Finally, we use time-varying industry downturns, matching, and CEO turnovers for inference. Overall, we offer novel evidence of valuable CEO learning around risk-taking following direct managerial experience as a firm policy determinant across economic conditions.     

CEO marital status and corporate cash holdings

We examine the effect of CEO marital status on corporate cash holdings. Consistent with the classical agency framework, we find that firms with single CEOs hold more cash compared to otherwise similar firms with married CEOs and that the excess cash held by single CEOs is significantly discounted by shareholders. Our findings survive a battery of tests to ease endogeneity and selection bias, confirming that results are not simply reflecting innate heterogeneity in preferences. Overall, our findings indicate that a variable outside the common firm- and macro-level determinants, CEO marital status, can significantly influence corporate policies.     

Charitable inclination and the chief executive officer's pay package

Using chief executive officers’ (CEOs’) lifetime nonemployment experience in prominent charitable organizations to create a proxy for CEO charitable inclination, I find that charitably inclined CEOs receive a significant pay premium. The pay premium sensitivity to CEO charitable inclination is particularly pronounced for male, external, and specialist CEOs who are employed at firms that are undiversified, larger, less debt reliant, poor performing, facing high product‐market competition, and that keep nonmanipulative financial statements and demonstrate high inclination to social responsibility in the area of diversity, employee relations, and internal governance. This research contributes to the broader debate on labor market pricing of CEO characteristics.     

Outsider CEOs and corporate debt

We examine the extent to which outsider chief executive officers (CEOs) influence corporate financial leverage policies. We define an outsider CEO as one who appears in the reporting year and became CEO either immediately upon joining or within 3 months of joining a firm. There are arguments in the literature that the selection of an outsider CEO can either increase or decrease financial leverage. We investigate this issue using 11,118 Australian firm-year observations from 1216 firms listed during the period 2001–2015. Our findings suggest that, in the short-term after their appointment, outsider CEOs reduce firm dependence on debt. This result is robust to several additional tests and four measures to minimize endogeneity concerns. However, with an increase in their tenure at the firm, outsider CEOs revert to greater dependency on corporate debt. After supplementary analyses, we determine that the outsider CEOs short-term strategy of reducing financial leverage involves using cash reserves and restricting dividends to reduce existing debt. Instead, outsider CEOs finance capital expenditure projects thus providing a positive signal to the market that such CEOs are more creditworthy. Our results also suggest that outsider CEOs exercise more control over financial leverage when they have specialist attributes.     

It Takes Two: The Incidence and Effectiveness of Co‐CEOs

This study examines the phenomenon of co‐CEOs within publicly traded firms. Although shared executive leadership is not widespread, it occurs within some very prominent firms. We find that co‐CEOs generally complement each other in terms of educational background or executive responsibilities. Our results show that firms most likely to appoint co‐CEOs have lower leverage, a more limited firm focus, less independent board structure, fewer advising directors, lower institutional ownership, and greater levels of merger activity. The governance structure of co‐CEO firms suggests that co‐CEOships can serve as an alternative governance mechanism, with co‐CEO mutual monitoring substituting for board or external monitoring and co‐CEO complementary skills substituting for board advising. An event study indicates that the market reacts positively to appointments of co‐CEOs while a propensity score analysis shows that the presence of co‐CEOs increases firm valuation.     

CEO power and annual report reading difficulty

We examine the impact of CEO power on reading difficulty of corporate annual reports. We find that CEO power is positively related to reading difficulty, implying that annual reports of corporations with powerful CEOs are difficult to read and understand. More importantly, we find that the relation between CEO power and reading difficulty is moderated by earnings performance or corporate governance. Additional findings suggest that this relation becomes stronger for firms with lower financial reporting quality or for CEOs with shorter tenure. Our study not only joins the debate on the consequences of powerful CEOs but also uncovers several factors that moderate the relation between CEO power and annual report reading difficulty.     

Does CEO reputation matter for capital investments?

This paper examines the association between CEO reputation and corporate capital investments. The efficient contracting hypothesis predicts a positive association between CEO reputation and wealth effects of corporate capital investments. In contrast, the rent extraction hypothesis predicts that the wealth effects of capital investments are negatively associated with CEO reputation. We find that the stock market's responses to announcements of capital investments are more favorable for firms with more reputable CEOs. Moreover, CEO reputation mitigates the negative stock price reaction associated with announcements of capital investments by firms with high free cash flow and low growth opportunities. Additional analysis indicates that firms with more reputable CEOs exhibit significantly better post-investment operating performance improvements than those with less reputable CEOs, especially in firms with high free cash flow and low growth opportunities. Collectively, our results suggest that the efficient contracting hypothesis dominates the rent extraction hypothesis in terms of net economic impact of capital investments on the investing firm.     

Agency problems,product market competition and dividend policies in Japan

This study investigates whether product market competition reduces agency problems between controlling shareholders and minority shareholders in Japan. In particular, we examine firms’ dividend policies in competitive versus concentrated industries. In a large sample of Japanese firms, we find that firms in more competitive industries pay more dividends, are more likely to increase dividends and are less likely to omit dividends. Furthermore, the impact of firm‐level agency problems on dividend payouts is weaker in highly competitive industries. The results suggest that product market competition can be an effective industry‐level governance mechanism that can force managers to disgorge cash to outside investors.     

CEO power,M&A decisions,and market reactions

In this study we examine the relationship between CEO power, corresponding acquisition activities and market reactions to mergers and acquisitions (M&A) announcements with a Canadian M&A dataset (1997–2005). We use CEO excess pay as a proxy for CEO power. Our empirical results show that the market reactions to M&A announcements are not related to CEO power. It implies that powerful CEOs do not necessarily make value destroying acquisitions. Our results further show that CEO power levels are significantly higher for acquiring firms compared to the CEOs of non-acquiring firms. In other words, CEOs with more relative power make more acquisitions. Such acquisitions will increase the size of the firm and will allow CEOs to demand a higher compensation level for managing larger asset pools and to derive higher performance incentives that are also generally tied to firm size.     

What Drives CEOs to Take on More Risk? Some Evidence from the Laboratory of REITs

Many have pointed to excessive risk‐taking by the CEOs of financial firms as a contributor to the recent worldwide economic crisis. The same observers often blame questionable corporate governance structures and compensation practices for that risk‐taking. But is this perception correct? And what is the relationship between CEO incentives and risk‐taking outside of the financial industry, where the government guarantees provided by deposit insurance could have distorted incentives? In an attempt to answer these questions, the authors analyze the relationship between CEO incentives and corporate risk‐taking by 101 U.S. REITs during the period 2003 to 2007. Their main finding is that corporate risk‐taking, as measured by the growth rate in corporate debt (the only measure of risk that is completely under the control of the CEO), is inversely related to CEO stock ownership—that is, the larger the CEO's equity ownership stake, the slower the growth in debt financing and financial risk‐taking. At the same time, the authors find that financial risk‐taking is positively related to large cash bonuses for the CEOs and to situations in which the CEO is also chairman of the board of directors. Finally, the authors also report that CEOs who are relatively new to the job grow more slowly and borrow less, suggesting that boards of directors can temporarily contain risky expansion plans by the CEO. These results provide support for those corporate governance reformers who wish to cut cash bonus payments for CEOs in favor of long‐term stock ownership.     

Institutional Monitoring and REIT CEO Compensation

Our objective in this paper is to investigate the relationship between institutional ownership and CEO compensation structure of REITs. Based on detailed analyses of data on institutional ownership, performance, CEO and board characteristics over the 10 year period 1998–2007, we find significant evidence that large institutions influence governance through CEO compensation—greater institutional ownership is associated with greater emphasis on incentive-based compensation (higher pay-performance sensitivity of CEO compensation), and higher cash and total compensation for CEOs. Further, we find that institutions are less active when managers are performing in a superior fashion. Two important conclusions emerge from the analysis. First, similar to unregulated firms, institutional owners do act as monitors in REITs. Broadly, this result suggests that governance is necessary for REITs. Second, institutional investors set a high pay-performance sensitivity for CEOs, but are willing to pay higher cash compensation to induce managers to take risk.     

The timing of changes in CEO compensation from cash bonus to equity-based compensation: Determinants and performance consequences

This study examines the determinants and performance consequences of changes in CEO compensation structure. The study uses the unique setting when Australian companies have changed from cash bonus to equity-based compensation. While most US CEOs receive some form of equity-based compensation, Australian CEOs have not always been paid equity-based compensation. According to efficient contracting theories, we argue that the change to equity-based compensation is driven by changes in firm characteristics and by the occurrence of CEO turnover, the latter of which provides a less costly opportunity for such change. Our results are consistent with the above arguments. We also document a significant negative association between changes in compensation structure and subsequent firm performance in the following year, even after controlling for CEO turnover and poor governance environments. Overall, our results suggest that the initial change to equity-based compensation is part of an error learning process made by firms that leads them towards efficient CEO compensation contracts.     

How do family ownership,control and management affect firm value?

Using proxy data on all Fortune-500 firms during 1994–2000, we find that family ownership creates value only when the founder serves as CEO of the family firm or as Chairman with a hired CEO. Dual share classes, pyramids, and voting agreements reduce the founder's premium. When descendants serve as CEOs, firm value is destroyed. Our findings suggest that the classic owner-manager conflict in nonfamily firms is more costly than the conflict between family and nonfamily shareholders in founder-CEO firms. However, the conflict between family and nonfamily shareholders in descendant-CEO firms is more costly than the owner-manager conflict in nonfamily firms.     

Corporate governance and firm cash holdings in the US

Using governance metrics based on antitakeover provisions and inside ownership, we find that firms with weaker corporate governance structures actually have smaller cash reserves. When distributing cash to shareholders, firms with weaker governance structures choose to repurchase instead of increasing dividends, avoiding future payout commitments. The combination of excess cash and weak shareholder rights leads to increases in capital expenditures and acquisitions. Firms with low shareholder rights and excess cash have lower profitability and valuations. However, there is only limited evidence that the presence of excess cash alters the overall relation between governance and profitability. In the US, weakly controlled managers choose to spend cash quickly on acquisitions and capital expenditures, rather than hoard it.     

Bidder CEO and Other Executive Compensation in UK M&As

This paper investigates the impact of M&As on bidder (CEO and other) executive compensation employing a unique sample of 100 completed bids in the UK over the 1998–2001 period. Our findings indicate that less independent and larger boards award CEOs significantly higher bonuses and salary following M&A completion both for the full sample and for the UK and US sub‐samples. UK CEOs and executives are rewarded more for the effort exerted in accomplishing intra ‐ industry or large mergers than for diversifying or small mergers and their cash pay is unaffected by other measures of their managerial skill or performance. US bidders are rewarded at higher levels than their UK counterparts and their remuneration is related only to measures of CEO dominance over the board of directors. Overall our findings offer support for the managerial power rather than the agency theory perspective on managerial compensation.     

Understanding the relationship between founder–CEOs and firm performance

We use instrumental variables methods to disentangle the effect of founder–CEOs on performance from the effect of performance on founder–CEO status. Our instruments for founder–CEO status are the proportion of the firm's founders that are dead and the number of people who founded the company. We find strong evidence that founder–CEO status is endogenous in performance regressions and that good performance makes it less likely that the founder retains the CEO title. After factoring out the effect of performance on founder–CEO status, we identify a positive causal effect of founder–CEOs on firm performance that is quantitatively larger than the effect estimated through standard OLS regressions. We also find that founder–CEOs are more likely to relinquish the CEO post after periods of either unusually low or unusually high operating performances. All in all, the results in this paper are consistent with a largely positive view of founder control in large US corporations.     

CEO power,product market competition and the acquisition motive for going public

This study finds that CEO power and product market competition differentially influence post‐IPO growth strategy and its economic consequences. Powerful CEOs are more likely to prefer acquisition growth over internal investment. Further, while CEO power is positively related to the likelihood, frequency and size of post‐IPO acquisitions, it is unrelated to the post‐IPO performance of acquisitive firms. In contrast, product market rivalry does not increase post‐IPO acquisitiveness but is positively related to the performance of acquirers. Finally, CEO power enhances the performance of acquisitive IPO firms only when faced with intense competitive rivalry.