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Moderating Powerful CEOs through Improved Governance

55 Pages Posted: 10 Jan 2018  

Mark Humphery-Jenner

UNSW Business School; Financial Research Network (FIRN)

Emdad Islam

University of New South Wales (UNSW), School of Banking and Finance

Lubna Rahman

UNSW Business School

Jo-Ann Suchard

UNSW Australia Business School, School of Banking and Finance; Financial Research Network (FIRN)

Date Written: December 19, 2017

Abstract

This paper interfaces with two controversies in the literature: how to reign in powerful CEOs, and whether and when shareholders gain governance mandates, such as those in the Sarbanes-Oxley Act (SOX) of 2002 and NYSE/NASDAQ listing rules. We use the concurrent passage of the Sarbanes-Oxley Act (SOX) of 2002 and NYSE/NASDAQ listing rule changes as an exogenous shock to internal firm governance to explore the impact of powerful CEOs on corporate policies. We use the heterogeneity in firms’ pre-SOX governance to explore how improved governance can reign in powerful CEOs. For firms with weaker pre-SOX corporate governance (Non-Compliant Firms) and powerful CEOs, we find that the quasi-exogenous regulatory shock to governance initiated a strategic shift in resource allocation. In the post-SOX period, the pre-SOX Non-Compliant Firms with powerful CEOs reduced asset growth and acquisition expenditure, and improved acquisition performance. On the other hand, they increased R&D expenditure, and produced more patents, with more citations, that had a higher valuation. They also paid out more cash to shareholders in the form of dividends. This suggests that governance improvements help to re-align powerful CEOs’ interests with those of shareholders.

Keywords: Powerful CEOs, Sarbanes-Oxley Act (SOX), Compliant firms, Non-Compliant firms, R&D, Innovation, Empire building, CAPX, PPE, Dividend, Corporate governance

JEL Classification: G18, G30, G31, G32, G35, G38, K22, M48

Suggested Citation

Humphery-Jenner, Mark and Islam, Emdad and Rahman, Lubna and Suchard, Jo-Ann, Moderating Powerful CEOs through Improved Governance (December 19, 2017). Available at SSRN: https://ssrn.com/abstract=3090783

Mark Humphery-Jenner (Contact Author)

UNSW Business School ( email )

Sydney, NSW 2052
Australia

Financial Research Network (FIRN)

C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia

HOME PAGE: http://www.firn.org.au

Md Emdadul Islam

University of New South Wales (UNSW), School of Banking and Finance ( email )

Sydney
Australia
404627177 (Phone)
404627177 (Fax)

Lubna Rahman

UNSW Business School ( email )

Sydney, NSW 2052
Australia

Jo-Ann Suchard

UNSW Australia Business School, School of Banking and Finance ( email )

Sydney, NSW 2052
Australia
61 2 9385 5876 (Phone)
61 2 9385 6347 (Fax)

Financial Research Network (FIRN)

C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia

HOME PAGE: http://www.firn.org.au

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