Working Paper: CEPR ID: DP5500
Authors: Augustin Landier; David Sraer; David Thesmar
Abstract: In many instances, 'independently-minded' top-ranking executives can impose strong discipline on their CEO, even though they are formally under his authority. This paper argues that the use of such a disciplining mechanism is a key feature of good corporate governance. We provide robust empirical evidence consistent with the fact that firms with high internal governance are more efficiently run. We empirically label as 'independent from the CEO' a top executive who joined the firm before the current CEO was appointed. In a very robust way, firms with a smaller fraction of independent executives exhibit (1) a lower level of profitability and (2) lower shareholder returns after large acquisitions. These results are unaffected when we control for traditional governance measures such as board independence or other well-studied shareholder-friendly provisions.
Keywords: acquisition; corporate governance; corporate performance; executives
JEL Codes: D23; G14; G34
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| better internal governance (G38) | improved profitability (L21) |
| better internal governance (G38) | improved shareholder returns (G34) |
| fraction of independent executives (M12) | better performance metrics (C52) |
| fraction of independent executives (M12) | lower levels of profitability after large acquisitions (G34) |
| fraction of independent executives (M12) | lower shareholder returns after large acquisitions (G34) |
| independently-minded top executives (M12) | better corporate governance (G38) |
| independently-minded top executives (M12) | ability to challenge CEO's decisions (G34) |
| ability to challenge CEO's decisions (G34) | prevent value-destroying actions (D46) |