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

See all articles by Kee-Hong Bae

Kee-Hong Bae

York University - Schulich School of Business

Sadok El Ghoul

University of Alberta - Campus Saint-Jean

Zhaoran Gong

Xi'an Jiaotong-Liverpool University (XJTLU) - International Business School Suzhou

Omrane Guedhami

University of South Carolina - Moore School of Business

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

Suggested Citation

Bae, Kee-Hong and El Ghoul, Sadok and Gong, Zhaoran and Guedhami, Omrane, In the CEO We Trust: Negative Effects of Trust between the Board and the CEO (March 14, 2023). Journal of Financial and Quantitative Analysis, Forthcoming, Available at SSRN: https://ssrn.com/abstract=4388605 or http://dx.doi.org/10.2139/ssrn.4388605

Kee-Hong Bae

York University - Schulich School of Business ( email )

4700 Keele Street
Toronto, Ontario M3J 1P3
Canada
416-736-2100 ext) 20248 (Phone)
416-736-5687 (Fax)

Sadok El Ghoul (Contact Author)

University of Alberta - Campus Saint-Jean ( email )

Edmonton, Alberta T6G 2R3
Canada
780-465-8725 (Phone)
780-465-8760 (Fax)

Zhaoran Gong

Xi'an Jiaotong-Liverpool University (XJTLU) - International Business School Suzhou ( email )

111 Ren'ai Road
Suzhou Industrial Park
Suzhou, Jiangsu 215123
China

Omrane Guedhami

University of South Carolina - Moore School of Business ( email )

Columbia, SC
United States

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