Number Two Executives: Bottom-up Monitoring

Abstract

This paper empirically examines the role of a firm’s second-in-command in monitoring the CEO from the bottom up to mitigate agency problems. While CEOs have long been the focus, little research has addressed the No. 2 executive. This study provides a comprehensive understanding of these top executives and their roles in bottom-up monitoring. The results suggest that (1) bottom-up monitoring by No. 2 executives enhances firm value, (2) the effect is stronger in firms with weak corporate governance or poor CEO incentive alignment, (3) the effect is weaker when the No. 2 is promoted internally or lacks experience, and (4) such monitoring becomes more critical in the post-SOX regulatory environment. Further analysis reveals that bottom-up monitoring creates firm value by fostering a more transparent information environment, increasing CEO turnover-performance sensitivity, and reducing the CEO’s ability to pursue the “quiet life,” but has no effect on “empire building.”

Keywords: Bottom-up monitoring, Corporate governance, Agency problem, Empire building, Quiet life, Sarbanes-Oxley Act

JEL Classification: G34, G32, D23, J33