Incumbent Chief Executive Officer Research Articles

Do analysts’ recommendations reflect co-opted boards?

PurposeThis study aims to examine whether co-opted directors influence analysts’ recommendations. As information intermediaries, financial analysts should incorporate the quality of corporate governance into their valuation because well-governed firms are associated with lower agency costs and better performance. Co-opted directors are those appointed after the incumbent chief executive officer assumes office. The authors investigate whether board co-option has an effect on analyst recommendations.Design/methodology/approachThe present study uses univariate analysis, multi-variate regression analysis and conduct a natural experiment using the Sarbanes-Oxley as an exogenous shock.FindingsThe results show that firms with fewer co-opted directors tend to receive more favorable recommendations, suggesting that analysts favor firms with strong corporate governance. The results hold even after controlling for various firm characteristics, including the traditional measures of board quality, i.e. board size and independent directors.Originality/valueThe paper is the first of its kind and offers evidence on the effect of co-opted directors on analyst recommendations. The results contribute to the literature both in corporate governance and in financial intermediaries, where analysts play a crucial role in providing information to the various participants in financial markets.

Do Co‐Opted Directors Influence Dividend Policy?

AbstractWe explore how co‐opted directors affect dividend policy. Co‐opted directors are those appointed after the incumbent chief executive officer (CEO) assumes office. Our results show that co‐opted directors lead to a weaker propensity to pay dividends and, for dividend‐paying firms, significantly lower dividend payouts. We also show that board co‐option has more explanatory power for dividend policy than does the traditional measure of board effectiveness, that is, board independence. Exploiting the passage of the Sarbanes‐Oxley Act as a natural experiment, we show that the effect of board co‐option on dividend policy is more likely causal, rather than merely an association.

CEO succession decision in family businesses – A corporate governance perspective

Abstract Using a comprehensive database of Taiwanese family-owned business, this study investigates chief executive officer (CEO) selection decisions in family-owned businesses. Our data sample is composed of 129 listed family businesses from 1998 to 2008. By employing theories of family-owned business succession and corporate governance, the study examines the influence of chairman of the board (COB) and CEO duality, current CEO/family relations, and shareholding ratio of outside directors on CEO-selection decisions in family-owned businesses. The results demonstrate that a family-owned business is more likely to select an intra-firm member as the new CEO when the incumbent CEO is a family member. Moreover, a family-owned businesses are prone to selecting new CEOs from external sources when the shareholding ratio of outside directors is greater. Based on the findings, the study can contribute to CEO succession research and family-business research in emerging economies.

Co-opted directors and powerful CEOs: evidence from the CEO pay slice (CPS)

ABSTRACTWe explore the effect of co-opted directors on chief executive officer (CEO) power. Co-opted directors are those appointed after the incumbent CEO assumes office and are found by prior research to represent a weakened governance mechanism. Our evidence reveals that co-opted directors lead to less powerful CEOs, consistent with the substitution effect. Because co-opted directors impose less stringent oversight, the CEO is able to exercise a great deal of latitude in running the firm. Therefore, it is less necessary for the CEO to command so much power where more directors are co-opted, hence leading to less powerful CEOs. In other words, co-opted directors substitute for strong CEO power. Crucially, we find that board co-option exhibits much more explanatory power than does board independence, which has been the primary measure of board effectiveness in the literature.

How costly is corporate bankruptcy for the CEO?

We examine chief executive officer (CEO) career and compensation changes for large firms filing for Chapter 11. One-third of the incumbent CEOs maintain executive employment, and these CEOs experience a median compensation change of zero. However, incumbent CEOs leaving the executive labor market suffer a compensation loss with a median present value until age 65 of $7 million (five times pre-departure compensation). The likelihood of leaving decreases with profitability and CEO share ownership. Furthermore, creditor control rights during bankruptcy (through debtor-in-possession financing and large trade credits) are associated with CEO career change. Despite large equity losses (median $11 million for incumbents who stay until filing), the median incumbent does not reduce his stock ownership as the firm approaches bankruptcy.

Valuable Choices: Prominent Venture Capitalists’ Influence on Startup CEO Replacements

This paper explores how prominent venture capitalists (VCs) affect chief executive officer (CEO) replacement in startups. Defining prominence using eigenvector centrality, we use matching methods and instrumental variables to show that startup CEO replacement occurs more often and faster when prominent VCs participate. We further explore these VCs’ comparative advantage in managing CEO turnover, finding that the prominent VC effects increase as replacement costs rise, such as when incumbent CEOs are entrenched or possess specialized technology know-how, or when startups are in an early stage. When prominent VCs participate, replacement CEOs are disproportionately experienced outsiders—external hires who possess prior startup CEO experience. Our results reveal that CEO turnover is associated with increases in startups’ ex post innovation and survival performance, with experienced outsider CEO replacements showing the strongest survival rates. This paper was accepted by Gustavo Manso, finance.

The Effects of Succession Choice Surrounding CEO Turnover Announcements: Evidence from Marathon Successions

This study examines marathon successions, which I define as top executive searches that are extended past the formal departure notice of the incumbent chief executive officer (CEO). Marathons should be used when search costs are high and when little time passes from when the incumbent steps down to when they leave the firm. Consistent with these predictions, marathons primarily follow surprise departures and forced turnovers. Marathons are also likely for firms operating in heterogeneous industries that face early tenure incumbent departures. These findings shed light on an increasingly prevalent form of succession and provide insight into the rationale and implications behind the announcement.

How Costly is Corporate Bankruptcy for Top Executives?

We examine chief executive officer (CEO) career and compensation changes for large firms filing for Chapter 11. One-third of the incumbent CEOs maintain executive employment, and these CEOs experience a median compensation change of zero. However, incumbent CEOs leaving the executive labor market suffer a compensation loss with a median present value until age 65 of $7 million (five times pre-departure compensation). The likelihood of leaving decreases with profitability and CEO share ownership. Furthermore, creditor control rights during bankruptcy (through debtor-in-possession financing and large trade credits) are associated with CEO career change. Despite large equity losses (median $11 million for incumbents who stay until filing), the median incumbent does not reduce his stock ownership as the firm approaches bankruptcy.

The Effects of Succession Choice Surrounding CEO Turnover Announcements: Evidence from Marathon Successions

This study examines marathon successions, which I define as top executive searches that are extended past the formal departure notice of the incumbent chief executive officer (CEO). Marathons should be used when search costs are high and when little time passes from when the incumbent steps down to when they leave the firm. Consistent with these predictions, marathons primarily follow surprise departures and forced turnovers. Marathons are also likely for firms operating in heterogeneous industries that face early tenure incumbent departures. These findings shed light on an increasingly prevalent form of succession and provide insight into the rationale and implications behind the announcement.

Compensation committee governance quality, chief executive officer stock option grants, and future firm performance

This paper examines whether the relationship between future firm performance and chief executive officer (CEO) stock option grants is affected by the quality of the compensation committee. Compensation committee quality is measured using six committee characteristics – the proportion of directors appointed during the tenure of the incumbent CEO, the proportion of directors with at least ten years’ board service, the proportion of directors who are CEOs at other companies, the aggregate shareholding of directors on the compensation committee, the proportion of directors with three or more additional board seats, and compensation committee size. We find that future firm performance is more positively associated with stock option grants as compensation committee quality increases.

Managerial Entrenchment and the Market for CEOs

This paper studies how the generality of managerial skills affects firms' governance decisions. As managerial skills become less firm-specific and more portable across firms, the market for talent offers better opportunities for replacing an incumbent chief executive officer (CEO) with an external hire. This results in higher pay in the market, but, overall, the profitability of an external appointment increases in large firms, where managerial talent is most productive. As a consequence, large firms limit the entrenchment of incumbent managers to take advantage of the improved replacement opportunities offered by the market. The analysis rationalizes the recent trend toward stronger corporate governance and offers novel empirical predictions concerning the relationship between managerial entrenchment, firm size and the generality of managerial skills.

Boards of Directors and Shark Repellents:Assessing the Value of an Agency Theory Perspective

Because shark repellents decrease the vulnerability of firms (and their incumbent managers) to the market for corporate control, the decision to adopt these devices represents an excellent test of agency theory. In this empirical study, we examined the relationships between the adoption of shark repellents and several mechanisms that, according to agency theory, should align the interests of corporate board members and shareholders and/or make directors more effective monitors of management behaviour. Of the variables included, only board stock ownership (especially by employee directors) was linked to a reduced propensity to adopt shark repellents in the predicted manner. Two variables not immediately as‐ sociated with agency theory — the proportion of inside directors appointed by the incumbent chief executive officer (CEO) and a lower ratio of CEO compensation to the compensation of other top executives — were linked to higher rates of shark repellent adoption. Given that agency theory explains relatively little of the variance in shark repellent adoption, we advocate serious consideration of other theoretical formulations for corporate governance, including two approaches — stewardship theory and agent morality — that take the moral (‘other regarding’) obligations of directors seriously.

Diversification Strategies and the Experience of Top Executives of Large Firms

AbstractPrior research by Berg and Pitts has shown that there is a difference in the diversification strategies followed by major corporations; this strategy depends upon the type of organizational structure at the corporate level. This paper extends research on diversification strategy by testing the hypotheses that the skills and competence of the incumbent chief executive officer of a major firm are associated with its diversification strategy. Using empirical data spanning the years 1965‐1980 for fifty‐three major U.S. firms that have diversified and grown, it is shown that the background and prior experience of the incumbent CEO of each firm is significantly associated with the diversification strategy of a firm. This has implications for boards of directors in their search for and selection of top level corporate executives, as well as implications for managers in search of executive jobs.