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Is Chief Executive Officer Power Bad? *

Is Chief Executive Officer Power Bad? * This paper focuses on abnormal chief executive officer (CEO) structural power over top executives and examines its impacts on CEO pay for performance sensitivity and firm performance. We find that greater abnormal power is associated with weaker firm performance, but the relation is significant only when monitoring by external shareholders is weak. We also identify a channel through which the power adversely impacts firm performance: CEOs’ capture of the compensation process. Greater abnormal CEO power lowers CEOs’ pay for performance sensitivity, but again the relation is driven by observations under weak external monitoring. External monitoring is measured by institutional ownership concentration; the abnormal power, by residuals of a regression relating CEO structural power to its likely determinants. The negative impact of the abnormal power on firm performance is robust to potential reverse causality. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Asia-Pacific Journal of Financial Studies Wiley

Is Chief Executive Officer Power Bad? *

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Publisher
Wiley
Copyright
© 2011 Korean Securities Association
ISSN
2041-9945
eISSN
2041-6156
DOI
10.1111/j.2041-6156.2011.01047.x
Publisher site
See Article on Publisher Site

Abstract

This paper focuses on abnormal chief executive officer (CEO) structural power over top executives and examines its impacts on CEO pay for performance sensitivity and firm performance. We find that greater abnormal power is associated with weaker firm performance, but the relation is significant only when monitoring by external shareholders is weak. We also identify a channel through which the power adversely impacts firm performance: CEOs’ capture of the compensation process. Greater abnormal CEO power lowers CEOs’ pay for performance sensitivity, but again the relation is driven by observations under weak external monitoring. External monitoring is measured by institutional ownership concentration; the abnormal power, by residuals of a regression relating CEO structural power to its likely determinants. The negative impact of the abnormal power on firm performance is robust to potential reverse causality.

Journal

Asia-Pacific Journal of Financial Studies – Wiley

Published: Aug 1, 2011

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