Management Connectedness and Corporate Investment
53 Pages Posted: 24 Jan 2018 Last revised: 20 Sep 2018
Date Written: September 18, 2018
Distinct from prior literature that focuses on board quality and CEO characteristics, this study examines how the connectedness between CEO and subordinate C-level executives affects corporate investment decisions, where a senior manager is assumed to be loyal to the CEO if he is appointed during the current CEO’s tenure. In a sample of S&P1500 companies from 2000 to 2015, we observe a robust decline in corporate investment rate in firms with strong management connectedness. Our results reveal the connectedness weakens the firm sensitivity of investment to growth opportunities, suggesting that it undermines investment efficiency and therefore harms firm performance. Further analysis suggests that the connected senior managers appear to derive private benefits from their alliance. We find that the total compensation for all executives is higher but the sensitivity of pay and CEO turnover to performance is lower in firms with a greater level of management connectedness. Interestingly, proxies for board effectiveness yield no significant direct or moderating effects on corporate investment activity in presence of management connectedness control.
Keywords: Corporate investment, top management team, CEO power, internal governance
JEL Classification: G31, G34, M12
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