Management Connectedness and Corporate Investment

53 Pages Posted: 24 Jan 2018 Last revised: 20 Sep 2018

See all articles by Man Pham

Man Pham

University of Western Australia - Department of Accounting and Finance

Jing Yu

The University of Western Australia - Department of Accounting and Finance

Mahmoud Agha

University of Western Australia

Date Written: September 18, 2018

Abstract

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

Suggested Citation

Pham, Man and Yu, Jing and Agha, Mahmoud, Management Connectedness and Corporate Investment (September 18, 2018). Asian Finance Association (AsianFA) 2018 Conference. Available at SSRN: https://ssrn.com/abstract=3108227 or http://dx.doi.org/10.2139/ssrn.3108227

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

Mahmoud Agha

University of Western Australia ( email )

Crawley, Western Australia 6009
Australia

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