Abstract
Prior literature associates CEO power with agency problems and documents the negative relationship between CEO power and firm value (e.g., Bebchuk et al., 2011). However, the ‘optimal’ level of CEO power may differ for every firm and for individual CEO depending on firm and CEO characteristics. In this study, we estimate the normal (‘optimal’) level of CEO power and show that the association between CEO power and firm value is nonmonotonic. Our results reveal that the normal level of CEO power is positively associated with firm value while excess and deficient CEO power is negatively associated with firm value. Using the residuals from our estimation model of CEO power, we illustrate that our measure of residual CEO power has an inverse U-shaped relationship with firm value.
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