Management Connectedness and Corporate Investment

53 Pages Posted: 24 Jan 2018 Last revised: 19 Mar 2020

See all articles by Mahmoud Agha

Mahmoud Agha

University of Western Australia

Man Pham

University of Western Australia - Department of Accounting and Finance

Jing Yu

The University of Western Australia - Department of Accounting and Finance

Date Written: January 28, 2020

Abstract

This study examines how the connectedness between CEO and subordinate C-level executives undermines the independence of top management team (TMT) and adversely affects corporate investment decisions, where a senior manager is assumed to be loyal to the CEO if he/she is appointed during the current CEO's tenure. In a sample of S&P1,500 companies from 2000 to 2015, we document the underinvestment problem in firms with strong TMT connectedness. This baseline evidence is robust to a series of identification strategies, alternative measures of connectedness and controls for conventional measures of board effectiveness. Further analyses reveal that the connected managers derive private benefits from the divested investment resources, and the CEOs tend to use their collective power to reduce the risk of being dismissed when their firms perform poorly.

Keywords: Corporate investment, top management team, CEO power, internal governance

JEL Classification: G31, G34, M12

Suggested Citation

Agha, Mahmoud and Pham, Man and Yu, Jing, Management Connectedness and Corporate Investment (January 28, 2020). Asian Finance Association (AsianFA) 2018 Conference. Available at SSRN: https://ssrn.com/abstract=3108227 or http://dx.doi.org/10.2139/ssrn.3108227

Mahmoud Agha

University of Western Australia ( email )

Crawley, Western Australia 6009
Australia

Man Pham (Contact Author)

University of Western Australia - Department of Accounting and Finance ( email )

Australia

Jing Yu

The University of Western Australia - Department of Accounting and Finance ( email )

School of Business
35 Stirling Highway
Crawley, Western Australia 6009
Australia

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