60 Pages Posted: 15 Nov 2007 Last revised: 10 May 2009
We investigate the relationship between CEO centrality - the relative importance of the CEO within the top executive team in terms of ability, contribution, or power - and the value, performance and behavior of public firms. Our proxy for CEO centrality is the fraction of the aggregate compensation of the top-five executive team captured by the CEO. We find that CEO centrality is negatively associated with firm value (as measured by industry-adjusted Tobin's Q). This result is robust to controlling for all standard controls in Q regressions as well as additional controls such as CEO tenure, whether the CEO is a founder or a large owner, and whether the company's top-five aggregate compensation is high or low relative to peer companies. CEO centrality also has a rich set of relations with firms' behavior and performance. In particular, CEO centrality is correlated with (i) lower (industry-adjusted) accounting profitability, (ii) lower stock returns accompanying acquisitions announced by the firm and higher likelihood of a negative stock return accompanying such announcements, (iii) higher odds of the CEO's receiving a "lucky" option grant at the lowest price of the month, (iv) greater tendency to reward the CEO for luck due to positive industry-wide shocks, (v) lower performance sensitivity of CEO turnover, and (vi) lower firm-specific variability of stock returns over time.
Keywords: Executive compensation, corporate governance, CEOs, executives, options, equity-based compensation, non-equity compensation, Tobin's Q, firm entrenchment, CEO turnover, independent directors, CEO chair, acquisitions, CEO turnover, pay for luck., variability of returns, pay distribution, internal pay
JEL Classification: D23, G32, G38, J33, J44, K22, M14
Suggested Citation: Suggested Citation
Cremers, Martijn and Bebchuk, Lucian A. and Peyer, Urs, CEO Centrality. Harvard Law and Economics Discussion Paper No. 601, 2007. Available at SSRN: https://ssrn.com/abstract=1030107 or http://dx.doi.org/10.2139/ssrn.1030107
By Kevin Murphy