CEO Duality, Agency Costs, and Internal Capital Allocation Efficiency

Forthcoming, British Journal of Management

38 Pages Posted: 7 Nov 2016 Last revised: 28 Nov 2017

Nihat Aktas

WHU - Otto Beisheim School of Management

Panayiotis C. Andreou

Cyprus University of Technology

Isabella Karasamani

University of Central Lancashire; University of Durham

Dennis Philip

Durham University Business School

Date Written: November 6, 2016

Abstract

This study examines the impact of CEO duality on firms’ internal capital allocation efficiency. We observe that when the CEO is also chair of the board, diversified firms make inefficient investments, as they allocate more capital to business segments with relatively low growth opportunities over segments with high growth opportunities. The adverse impact of CEO duality on investment efficiency prevails only among firms that face high agency problems, as captured by high free cash flows, staggered board structure and low board independence. Depending on the severity of the agency problem, CEO duality is associated with a decrease in industry-adjusted investment in high growth segments of 1% to 2.1% over the following year, relative to those in low growth segments. However, CEOs’ equity-based compensation curbs the negative effect of CEO duality on internal capital allocation efficiency. Overall, the findings of this study offer strong support for the agency theory and postulate the internal capital allocation policy as an important channel through which CEO duality lowers firm value in diversified firms.

Keywords: CEO duality; Internal capital allocation; Investment efficiency; Agency costs; Board structure; Equity-based compensation

JEL Classification: G38; G34; M48

Suggested Citation

Aktas, Nihat and Andreou, Panayiotis C. and Karasamani, Isabella and Philip, Dennis, CEO Duality, Agency Costs, and Internal Capital Allocation Efficiency (November 6, 2016). Forthcoming, British Journal of Management. Available at SSRN: https://ssrn.com/abstract=2865169 or http://dx.doi.org/10.2139/ssrn.2865169

Nihat Aktas

WHU - Otto Beisheim School of Management ( email )

Burgplatz 2
Vallendar, 56179
Germany

Panayiotis C. Andreou (Contact Author)

Cyprus University of Technology ( email )

School Of Management and Economics
P.O. Box 50329
Lemesos, 3036
Cyprus

HOME PAGE: http://www.pandreou.com

Isabella Karasamani

University of Central Lancashire

Corporation Street
Preston, PR1 2HE
United Kingdom

University of Durham ( email )

Mill Hill Lane
Durham, DH1 3LB
United Kingdom

Dennis Philip

Durham University Business School ( email )

Department of Economics and Finance
Mill Hill Lane
Durham, DH1 3LB
United Kingdom

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