Boards, CEO Entrenchment and the Cost of Capital

Abstract:     
Existing research on CEO turnover focuses on CEO ability. This paper argues board ability is also important. Corporate boards will be reluctant to replace CEOs as this makes financing expensive by sending a negative signal about board ability. This differs from existing literature: entrenchment does not result from CEO power, nor agency problems. Entrenchment is mitigated when there are more assets-in-place relative to investment opportunities. The paper also compares public and private equity ownership. Private ownership eliminates CEO entrenchment, but a share price guides investment decisions. Finally, the model implies that board choice in publicly listed firms will be conservative.

Number of Pages in PDF File: 34

Keywords: corporate governance, entrenchment, boards, CEO

JEL Classification: G32, G34, D21

working papers series