58 Pages Posted: 22 Mar 2017 Last revised: 28 Mar 2017
Date Written: March 20, 2017
We examine bargaining dynamics between the CEO and the board of directors using a newly constructed panel of data from 1918 to 2011. In the year that a new CEO is hired, board independence increases significantly, consistent with new CEOs having less bargaining power initially. We find that as the CEO’s tenure (and thus power) increases, an additional year on the job is associated with a significant decline in board independence, an increase in the probability that the CEO holds the board chairman title, and an increase in compensation. The tenure-board independence relation is weaker when there is more uncertainty about the CEO’s ability and after events that reduce CEO power, such as targeting by activist investors. We also find that powerful CEOs are less likely to be replaced conditional on poor firm performance and that board structure is highly persistent. Finally, event studies document a positive market reaction when powerful CEO’s die in office, in contrast to no market reaction to typical CEO deaths, consistent with powerful CEOs becoming entrenched.
Keywords: CEOs, boards, bargaining power, dynamics
JEL Classification: G34,
Suggested Citation: Suggested Citation