132nd Seminar on Finance and Accounting

Topic: Unintended Consequences of the Independent Board Requirement on CEO Power

 

Presenter:Yao Lu, Assistant Professor in finance, Qinghua University

 

Time: December 10, 2010(Friday)3:00—4:30PM

 

Venue: Room 501, Jiageng Bld 2

 

Chair: Zhe Shen, assistant professor in finance, IFAS

 

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Abstract:

 

NYSE and NASDAQ listed firms are required to have a majority of independent directors starting 2004. Since the regulation can weaken CEO influence over the board, affected CEOs may counter it by building a closely aligned team of top executives to  strengthen  their structural power.  Using a differences-in-differences  approach, we find that  affected  CEOs  fill their executive suites  with  significantly  higher abnormal fractions of top executives hired or promoted during their tenure, and with executives with previous employment ties. This finding is not due to greater executive turnovers, confounding effects, corporate frauds, or appointing new CEOs. The accumulation of CEO power at affected firms is associated with less profitable acquisition bids and lower firm valuation. And the power increases at affected firms are observed only when they are subject to weak external governance. These findings raise the question of whether the benefits of the regulation justify its unintended consequences.

 

Download:luyao_paper_120610.pdf