Abstract
AbstractPrevious corporate governance research has paid little attention to the role of chief executive officer (CEO) labor markets in controlling CEO behaviors because the CEO labor market has been considered inefficient. With the increasing mobility of top executives across firms, however, the potential of CEO labor markets to serve as an external disciplining force has been growing. In this study, we argue that CEOs will be more pressured to engage in desirable behaviors as the CEO labor market becomes more efficient. Using a longitudinal sample of S&P 1500 firms in high-technology industries in United States from 2011 to 2019, we found that CEOs tend to increase R&D investment as CEO labor market supply increases. We also found that the tendency is greater when external CEO succession is more frequent in the market. Our results demonstrate that CEO labor markets have the potential to function as an effective external governance mechanism.
Highlights
At corporations where ownership and control are separated from each other, agency problems occur because chief executive officers (CEOs) tend to make decisions that primarily serve their own interests at the expense of shareholders (Eisenhardt, 1989; Fama & Jensen, 1983)
We examined whether CEO labor markets have the potential to be an effective external governance mechanism in controlling CEO’s self-serving behaviors
Using longitudinal panel data from S&P high-technology firms, we found that CEOs in high-tech industries are more disciplined to increase investment in R&D when their firm has a larger pool of potential external CEO candidates; market-level tendency to hire external CEOs did not affect R&D investment at individual firms
Summary
At corporations where ownership and control are separated from each other, agency problems occur because chief executive officers (CEOs) tend to make decisions that primarily serve their own interests at the expense of shareholders (Eisenhardt, 1989; Fama & Jensen, 1983). Firms seeking to hire an external CEO might run a great risk due to high risk and low legitimacy associated with infrequent external CEO successions in the market. These two CEO labor market conditions – short supply of external CEO candidates and infrequent external CEO succession in the market – were believed to make the market inefficient and discouraged firms from hiring external CEOs. As such, firms tended to select their new CEO primarily from within the firm as opposed to outside the firm (Ocasio, 1999). Khurana (2002a, p. 242) argued that ‘at least one-third of all CEO successions in large, publicly-held corporations are outsider successions.’ With the increasing mobility of top executives across firms, the potential of CEO labor markets to be an effective external force has been on the rise
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