CEO Directors, Executive Incentives, and Corporate Strategic Initiatives
58 Pages Posted: 28 Jul 2008
Date Written: July 28, 2008
This paper presents evidence on how directors who are active CEOs of other firms affect firm behavior and board effectiveness. I show that shareholders incur significant costs when other CEOs serve on the board. CEOs are paid more and their compensation is less sensitive to firm performance. This is not a rational premium for greater employment risk, since CEO directors are not associated with increased executive turnover rates or higher turnover-performance sensitivity. Also, CEO directors are not associated with increased investments in corporate innovation. However, acquisition returns increase with CEO directors, especially for firms with limited internal growth opportunities. My results suggest that while CEO directors can play important advisory roles, this potential benefit must be balanced against the real distortions in executive incentives associated with their service as directors.
Keywords: CEO directors, executive incentives, corporate innovation, acquisition returns
JEL Classification: G34
Suggested Citation: Suggested Citation