Does Combining the CEO and Chair Roles Cause Poor Firm Performance?

53 Pages Posted: 15 Nov 2015 Last revised: 25 Nov 2015

See all articles by Narayanan Jayaraman

Narayanan Jayaraman

Georgia Institute of Technology - Scheller College of Business

Vikram K. Nanda

University of Texas at Dallas - School of Management - Department of Finance & Managerial Economics

Harley E. Ryan

Georgia State University - Department of Finance

Date Written: September 18, 2015

Abstract

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

Jayaraman, Narayanan and Nanda, Vikram K. and Ryan, Harley E., Does Combining the CEO and Chair Roles Cause Poor Firm Performance? (September 18, 2015). Georgia Tech Scheller College of Business Research Paper No. 2015-11. Available at SSRN: https://ssrn.com/abstract=2690281 or http://dx.doi.org/10.2139/ssrn.2690281

Narayanan Jayaraman (Contact Author)

Georgia Institute of Technology - Scheller College of Business ( email )

800 West Peachtree St.
Atlanta, GA 30308
United States
404-894-4389 (Phone)
404-894-6030 (Fax)

Vikram K. Nanda

University of Texas at Dallas - School of Management - Department of Finance & Managerial Economics ( email )

2601 North Floyd Road
P.O. Box 830688
Richardson, TX 75083
United States

Harley E. Ryan

Georgia State University - Department of Finance ( email )

University Plaza
35 Broad Street, Suite 1221
Atlanta, GA 30303-3083
United States
404-651-2674 (Phone)
404-651-2630 (Fax)

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