Management Connectedness and Corporate Investment
53 Pages Posted: 24 Jan 2018 Last revised: 19 Mar 2020
Date Written: January 28, 2020
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: Suggested Citation