Does Duality Destroy Value?

Abstract

The issue of the separation of the roles of Chief Executive Officer (CEO) and Chairman of the Board (COB) has been at the centre stage of various corporate governance guidelines. While in the US, these roles are typically combined, in the UK companies are advised to split them following the guidelines of the various codes. We assess the market valuation of the decision to split/combine these roles using a sample of UK firms. We find that the decision to split (combine) the roles is greeted with significant positive (negative) abnormal returns and these abnormal returns are strongly related to various measures of agency costs. However, we do not find strong overperformance (underperformance) of companies that split (combine) the roles in the post-event period. Our results suggest that, contrary to the market's expectations, the split/combination of the roles of the CEO and the COB does not actually mitigate or exacerbate the agency conflicts.

Keywords: Agency conflicts, board structure, Cadbury recommendations, combined roles of the chairman and the CEO, financial performance

JEL Classification: G34, G38