Powerful CEOs in Uncertain Times: Survival of the Fittest
79 Pages Posted: 28 Dec 2022 Last revised: 11 Jan 2025
Date Written: July 01, 2022
Abstract
Contrary to the conventional focus on the costs of excessive CEO power, this study investigates whether powerful CEOs are beneficial and desirable under uncertainty. The evidence shows that powerful CEOs have a lower dismissal rate in uncertain times. As they exhibit better performance but no increased compensation, powerful CEOs are likely retained optimally for their effectiveness rather than by entrenched power. To mitigate endogeneity concerns surrounding CEO power, this paper utilizes the onset of COVID-19 pandemic as an unanticipated sudden spike in uncertainty, during which CEO power is unlikely to adjust swiftly to external conditions due to stickiness. The study proposes two potential mechanisms explaining why powerful CEOs are more effective under uncertainty: their willingness to share information with the board and their capability to take swift action. Overall, this study challenges the view that CEO power is always manipulative and detrimental.
Keywords: Corporate governance, CEO power, Uncertainty, CEO turnover
JEL Classification: G14, G34, M12
Suggested Citation: Suggested Citation