In the CEO We Trust: Negative Effects of Trust between the Board and the CEO
Journal of Financial and Quantitative Analysis, Forthcoming
68 Pages Posted: 20 Mar 2023 Last revised: 27 Mar 2023
Date Written: March 14, 2023
Abstract
In this study, we investigate whether and how trust between board members and the CEO (board–CEO trust) affects the performance of mergers and acquisitions. Contrary to conventional wisdom, we find that firms with higher levels of board–CEO trust exhibit poor M&A performance. High trust is associated with low acquisition announcement returns, long-term stock return performance, and post-deal operating performance. This negative effect of board–CEO trust is more pronounced among acquiring companies prone to agency problems. Our results suggest that, in the institutional setting of corporate boards, high trust can be too much of a good thing.
Keywords: Board of Directors, Board–CEO Trust, Corporate Board Governance, Mergers and Acquisition
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