CEO's managerial power, board committee memberships and idiosyncratic volatility

Abstract

Based on Upper Echelons Theory and Agency Theory, we explore the effect of CEOs' power through their tenure, board committee membership and other corporate governance factors on idiosyncratic volatility. Our study addresses the gap in the literature to find the direct link between the source of corporate governance practices and idiosyncratic volatility in stock price. We use a generalised method of moments in a panel analysis of Australian firms for 2004–2013 and a robust model that controls for firm size, firm age, trading volume, market-to-book ratio, dividend payout, the global financial crisis, product market competition and financial intermediaries. We find that CEOs who have stronger managerial power are associated with lower idiosyncratic volatility. This determining factor remains significant with the inclusion of widely-researched firm characteristics and external factors on idiosyncratic volatility in our robust analysis.