62 Pages Posted: 22 Mar 2017 Last revised: 15 Jun 2018
Date Written: June 5, 2018
We examine CEO-board dynamics using a new panel dataset that spans 1918 to 2011. Substantial director turnover occurs when a new CEO is hired but, despite this turnover, board structure is persistent. The changes in board structure that do occur are consistent with bargaining and dynamic agency theories: (i) In the year that a new CEO is hired, board independence increases significantly, consistent with increased monitoring of an unproven CEO; (ii) As the CEO’s tenure increases, board independence declines, the probability increases that the CEO becomes board chair, and compensation increases; (iii) The tenure-board-independence relation is weaker following poor performance, when there is more uncertainty about the CEO’s ability and after events that reduce CEO power, such as targeting by activist investors; (iv) CEOs with a history of success are less likely to be replaced conditional on poor firm performance. Finally, event studies document a positive market reaction when powerful CEOs die in office, in contrast to no market reaction to typical CEO deaths, consistent with powerful CEOs becoming entrenched.
Keywords: Governance, Chief Executive, Board of Directors, Dynamic Contracting, Bargaining, Compensation, Monitoring
JEL Classification: G3, J3, B26, M12
Suggested Citation: Suggested Citation