CEO Power and Decision-Making Under Pressure

Abstract

Are powerful CEOs more effective in responding to pressure from the economic environment? Concentrating decision-making power may facilitate rapid decision-making. However, the quality of decision-making may be compromised, with severe consequences for the firm if a powerful CEO is less likely to receive independent advice or to have his decisions scrutinized. We empirically investigate the relation between CEO power and decision-making under pressure by examining firm performance when industry conditions deteriorate. We focus on industry downturns since these represent an exogenous ‘shock’ to a firm’s environment. The decision making context is important and we focus on three settings where the net effect of CEO power is likely more consequential: when the firm is innovative and decision making is likely more complex, when the industry is competitive and poor decisions can be more serious in terms of firm value and when the industry is characterized by high managerial discretion. In these settings powerful CEOs are found to perform significantly worse than other CEOs during industry downturns -- suggesting contexts in which centralized decision-making is potentially of greater concern.