CEO Centrality

60 Pages Posted: 15 Nov 2007 Last revised: 10 May 2009

Martijn Cremers

University of Notre Dame

Lucian A. Bebchuk

Harvard Law School; National Bureau of Economic Research (NBER); Centre for Economic Policy Research (CEPR) and European Corporate Governance Institute (ECGI)

Urs Peyer

INSEAD - Finance

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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

Cremers, Martijn and Bebchuk, Lucian A. and Peyer, Urs, CEO Centrality. Harvard Law and Economics Discussion Paper No. 601, 2007. Available at SSRN: or

K. J. Martijn Cremers

University of Notre Dame ( email )

P.O. Box 399
Notre Dame, IN 46556-0399
United States

Lucian A. Bebchuk (Contact Author)

Harvard Law School ( email )

Cambridge, MA 02138
United States
617-495-3138 (Phone)
617-812-0554 (Fax)


National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Centre for Economic Policy Research (CEPR) and European Corporate Governance Institute (ECGI)

Urs C. Peyer

INSEAD - Finance ( email )

Boulevard de Constance
F-77305 Fontainebleau Cedex
+33 1 6072 4178 (Phone)
+33 1 6072 4045 (Fax)

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