Moderating Powerful CEOs through Improved Governance
55 Pages Posted: 10 Jan 2018
Date Written: December 19, 2017
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: Suggested Citation