Abstract
Using a regression interaction model and a biographical dataset, with which we can pinpoint periods during which friendships were likely to have developed, we study the relation between company value and the interplay between CEO power, CEO equity incentives and the friendliness of the board of directors. Consistent with our hypotheses developed below, we find that firm value tends to increase when equity incentives are combined with a friendly board of directors, and conclude that the negative effects of CEO power on firm value reported by others are limited to firms with weak CEO equity incentive compensation plans and arms-length boards of directors. We are the first to combine these datasets and show that friendship between powerful CEOs and their boards, when agency problems are mitigated through CEO compensation, leads to higher value.
Highlights
We study company value at the intersection of CEO power, board friendliness, and CEO equity incentive compensation
Consistent with our hypotheses developed below, we find that firm value tends to increase when equity incentives are combined with a friendly board of directors, and conclude that the negative effects of CEO power on firm value reported by others are limited to firms with weak CEO equity incentive compensation plans and arms-length boards of directors
This is consistent with Bebchuk et al.’s (2011) finding that powerful CEOs tend to have a negative impact on company value
Summary
We study company value at the intersection of CEO power, board friendliness, and CEO equity incentive compensation. When considered independently of each other, some have argued that these factors can lead to entrenched CEOs intent on benefiting themselves at stockholders’ expense According to this narrative, powerful CEOs misuse their power in part by handpicking friendly board members thereby reversing the oversight relationship between boards of directors and those whose performance the board is supposed to be monitoring. In Adams and Ferreira’s model, shareholders benefit from a friendly, collaborative relationship between the CEO and the board as long as the value of better advice, derived from more complete information sharing, is greater than the value lost through economic rents extracted by the CEO due to the friendly board’s presumably weaker monitoring Consistent with this model, Kang, Liu, Low and Zhang (2018) study the effect of friendly boards on firm innovation and report that firms whose boards contain at least one director who is socially connected to the CEO create more patents, patent citations, and firm value
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