CEO Duality, Agency Costs, and Internal Capital Allocations

40 Pages Posted: 7 Nov 2016  

Nihat Aktas

WHU - Otto Beisheim School of Management

Panayiotis C. Andreou

Cyprus University of Technology

Isabella Karasamani

Cyprus University of Technology

Dennis Philip

Durham University Business School

Date Written: November 6, 2016

Abstract

This study examines the impact of CEO duality on investment allocation efficiency and firm value. When a CEO is also the chair of the board, the firm makes relatively more investments in business segments with low growth opportunities than do firms in which these roles are held by different individuals. Such capital (mis)allocations violate the internal capital market efficiency tenet, exhibiting negative overall value consequences. However, the adverse impact of CEO duality on investment efficiency and value prevails only in firms with low CEO compensation incentives. Overall, the findings of this study indicate that the capital allocation process is an important channel through which CEO duality lowers firm value, and compensation incentives are an important internal device to mitigate this negative value effect.

Keywords: CEO Duality; Agency Costs; Capital Allocation; Investment Efficiency

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 Allocations (November 6, 2016). 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

Cyprus University of Technology ( email )

Limassol, 3603
Cyprus

Dennis Philip

Durham University Business School ( email )

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

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