Does Combining the CEO and Chair Roles Cause Poor Firm Performance?
53 Pages Posted: 15 Nov 2015 Last revised: 25 Nov 2015
Date Written: September 18, 2015
We use over 22,000 firm-year observations from 1995-2010 to investigate whether combining roles of CEO and board-chair causes poor performance. Our research design allows us to reconcile disagreement in the literature about whether CEO-chair duality impacts shareholder value. CEOs are awarded the additional title of board-chair following superior firm performance. A naïve analysis indicates a drop in firm performance following CEO promotion to chair. However, a research design that controls for the propensity to combine roles and performance mean-reversion reveals no post-appointment underperformance. Consistent with a learning explanation, investors react positively to combining both roles early in CEO’s tenure, but exhibit no reaction to combinations later in CEO’s tenure. Increases in post-combination compensation are unrelated to proxies for managerial power. Overall, there is no evidence that combining the CEO-chair positions hurts shareholder interests.
Keywords: Duality, Corporate Governance, Board Structure, Tournament Incentives, Learning
JEL Classification: G30; G23
Suggested Citation: Suggested Citation