CEO Power and Luck: Impact of Stock Markets on Building Powerful CEOs

54 Pages Posted: 21 Aug 2020 Last revised: 5 Oct 2020

See all articles by Turk Al-Sabah

Turk Al-Sabah

University of North Carolina (UNC) at Chapel Hill - Kenan-Flagler Business School

Date Written: August 17, 2020

Abstract

The optimal view of managerial power theory suggests that corporate boards reward CEOs with power for good firm performance as the boards' assessment of their ability is higher. In evaluating the CEO's quality, economic theory predicts that boards filter out luck from performance. Luck represents exogenous shocks to performance, such as market-wide conditions, that are outside the CEO's control. Contrary to the prediction, we find that CEOs are rewarded with power for luck. In the baseline specification, a one standard deviation increase in firm performance due to luck leads to a 3% increase in CEO power relative to the median. This finding is mainly driven by firms with weaker governance in terms of board structure and institutional ownership. We also find some evidence suggesting that CEOs who manage weakly governed firms are rewarded with power for good luck, but are not punished equally for bad luck. These results may suggest, given the opportunity, CEOs strategically time their entrenchment following good firm and market performance.

Keywords: CEO power, relative performance evaluation, corporate governance

JEL Classification: G30, G34, D20, M10, M50

Suggested Citation

Al-Sabah, Turk, CEO Power and Luck: Impact of Stock Markets on Building Powerful CEOs (August 17, 2020). Available at SSRN: https://ssrn.com/abstract=3675755 or http://dx.doi.org/10.2139/ssrn.3675755

Turk Al-Sabah (Contact Author)

University of North Carolina (UNC) at Chapel Hill - Kenan-Flagler Business School ( email )

McColl Building
Chapel Hill, NC 27599-3490
United States

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