Abstract

http://ssrn.com/abstract=1970591
 
 

Citations (1)



 


 



The Independent Board Requirement and CEO Connectedness


E. Han Kim


University of Michigan, Stephen M. Ross School of Business

Yao Lu


University of Michigan - Stephen M. Ross School of Business; Tsinghua University, SEM

December 10, 2011


Abstract:     
When regulation forces a board to become more independent than endogenously determined, the CEO may counteract by strengthening connectedness with other key players governing the firm. We find the independent board regulation triggered an increase in the fraction of top-executives appointed (FTA) during the incumbent CEO’s tenure, with the newly appointed executives showing more pre-existing network ties to the CEO. The closer connectedness seems to weaken the regulatory effect. When the regulation is binding in FTA — i.e., firms have little room to increase FTA, CEO compensation becomes lower, CEO pay becomes more sensitive to performance, forced CEO turnover becomes more likely when performance suffers, and Tobin’s Q increases. When firms have sufficient room to increase FTA to counter the regulation, we find the opposite — higher CEO compensation, lower CEO pay-for-performance sensitivity, lower forced CEO turnover-performance sensitivity, and lower Q. For these firms, the regulation leads to CEO entrenchment in executive suites, weakening monitoring and lowering shareholder value.

Number of Pages in PDF File: 59

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Date posted: December 11, 2011  

Suggested Citation

Kim, E. Han and Lu, Yao, The Independent Board Requirement and CEO Connectedness (December 10, 2011). Available at SSRN: http://ssrn.com/abstract=1970591 or http://dx.doi.org/10.2139/ssrn.1970591

Contact Information

E. Han Kim (Contact Author)
University of Michigan, Stephen M. Ross School of Business ( email )
701 Tappan Street
Ann Arbor, MI MI 48109
United States
734-764-2282 (Phone)
734-763-3117 (Fax)
Yao Lu
University of Michigan - Stephen M. Ross School of Business ( email )
701 Tappan St. Rm R4323
Ann Arbor, MI 48109
United States
7347093843 (Phone)
HOME PAGE: http://sitemaker.umich.edu/yaolu_michigan/yao_lu_s_homepage
Tsinghua University, SEM ( email )
Wenlun Building 347#
Beijing, 100084
China
8610-62797399 (Phone)
HOME PAGE: http://sitemaker.umich.edu/yaolu_michigan/yao_lu_s_homepage
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