Concentration of Power and Corporate Performance Variability
63 Pages Posted: 27 Feb 2013
Date Written: February 26, 2013
Abstract
We investigate whether the concentration of power in the hands of individuals characterized as business leaders influences the variability of corporate performance. We do so by proposing an original method to estimate the concentration of power that takes into account both the individual characteristics of business leaders and the functioning and composition of the board of directors. We apply our analysis to 204 firms in France and find that firms under more powerful business leaders exhibit lower performance volatility. Our interpretation is that, although these firms are more exposed to the unilateral and potentially more extreme decision making of single individuals, other forces, such as the lack of diversification of leaders’ personal assets, their desire to maintain the status quo or their commitment to the firm’s long-term survival because of obligations to other stakeholders, seem to be stronger, thus inducing powerful business leaders to behave more conservatively. Our results contribute to the literature by showing that the effect of the concentration of power on performance variability in not necessarily driven by the issue of individual versus collective decision making. Instead, other factors, involving the institutional environment and the characteristics of individual business leaders, seem to play a major role.
Keywords: Concentration of Power, Business Leadership, CEO Power, Individual and Collective Decision-Making, Functioning and Diversity of the Board of Directors
JEL Classification: G32, G34, G30, D03, M19
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