IDEAS home Printed from https://ideas.repec.org/a/eee/finana/v48y2016icp21-30.html
   My bibliography  Save this article

CEO's managerial power, board committee memberships and idiosyncratic volatility

Author

Listed:
  • Tan, Monica
  • Liu, Bin

Abstract

Based on Upper Echelons Theory and Agency Theory, we explore the effect of CEOs' power through their tenure, board committee membership and other corporate governance factors on idiosyncratic volatility. Our study addresses the gap in the literature to find the direct link between the source of corporate governance practices and idiosyncratic volatility in stock price. We use a generalised method of moments in a panel analysis of Australian firms for 2004–2013 and a robust model that controls for firm size, firm age, trading volume, market-to-book ratio, dividend payout, the global financial crisis, product market competition and financial intermediaries. We find that CEOs who have stronger managerial power are associated with lower idiosyncratic volatility. This determining factor remains significant with the inclusion of widely-researched firm characteristics and external factors on idiosyncratic volatility in our robust analysis.

Suggested Citation

  • Tan, Monica & Liu, Bin, 2016. "CEO's managerial power, board committee memberships and idiosyncratic volatility," International Review of Financial Analysis, Elsevier, vol. 48(C), pages 21-30.
    • Handle: RePEc:eee:finana:v:48:y:2016:i:c:p:21-30
    DOI: 10.1016/j.irfa.2016.09.003
    as

    Download full text from publisher

    File URL: http://www.sciencedirect.com/science/article/pii/S1057521916301260
    Download Restriction: Full text for ScienceDirect subscribers only
    File URL: https://libkey.io/10.1016/j.irfa.2016.09.003?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Turan G. Bali & Nusret Cakici & Xuemin (Sterling) Yan & Zhe Zhang, 2005. "Does Idiosyncratic Risk Really Matter?," Journal of Finance, American Finance Association, vol. 60(2), pages 905-929, April.
    2. Danny Miller, 1991. "Stale in the Saddle: CEO Tenure and the Match Between Organization and Environment," Management Science, INFORMS, vol. 37(1), pages 34-52, January.
    3. Ang, Andrew & Hodrick, Robert J. & Xing, Yuhang & Zhang, Xiaoyan, 2009. "High idiosyncratic volatility and low returns: International and further U.S. evidence," Journal of Financial Economics, Elsevier, vol. 91(1), pages 1-23, January.
    4. Pathan, Shams, 2009. "Strong boards, CEO power and bank risk-taking," Journal of Banking & Finance, Elsevier, vol. 33(7), pages 1340-1350, July.
    5. Miguel A. Ferreira & Paul A. Laux, 2007. "Corporate Governance, Idiosyncratic Risk, and Information Flow," Journal of Finance, American Finance Association, vol. 62(2), pages 951-989, April.
    6. José-Miguel Gaspar, 2006. "Idiosyncratic Volatility and Product Market Competition," The Journal of Business, University of Chicago Press, vol. 79(6), pages 3125-3152, November.
    7. Vasia Panousi & Dimitris Papanikolaou, 2012. "Investment, Idiosyncratic Risk, and Ownership," Journal of Finance, American Finance Association, vol. 67(3), pages 1113-1148, June.
    8. Rafael La Porta & Florencio Lopez‐de‐Silanes & Andrei Shleifer & Robert W. Vishny, 2000. "Agency Problems and Dividend Policies around the World," Journal of Finance, American Finance Association, vol. 55(1), pages 1-33, February.
    9. Paul Gompers & Joy Ishii & Andrew Metrick, 2003. "Corporate Governance and Equity Prices," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 118(1), pages 107-156.
    10. Merton, Robert C, 1987. "A Simple Model of Capital Market Equilibrium with Incomplete Information," Journal of Finance, American Finance Association, vol. 42(3), pages 483-510, July.
    11. Tian, Gloria Y. & Twite, Garry, 2011. "Corporate governance, external market discipline and firm productivity," Journal of Corporate Finance, Elsevier, vol. 17(3), pages 403-417, June.
    12. Agrawal, Anup & Knoeber, Charles R., 1996. "Firm Performance and Mechanisms to Control Agency Problems between Managers and Shareholders," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 31(3), pages 377-397, September.
    13. David Roodman, 2009. "How to do xtabond2: An introduction to difference and system GMM in Stata," Stata Journal, StataCorp LP, vol. 9(1), pages 86-136, March.
    14. Lo, Andrew W & Wang, Jiang, 2000. "Trading Volume: Definitions, Data Analysis, and Implications of Portfolio Theory," The Review of Financial Studies, Society for Financial Studies, vol. 13(2), pages 257-300.
    15. Mitton, Todd, 2004. "Corporate governance and dividend policy in emerging markets," Emerging Markets Review, Elsevier, vol. 5(4), pages 409-426, December.
    16. Chen, Jing & Ezzamel, Mahmoud & Cai, Ziming, 2011. "Managerial power theory, tournament theory, and executive pay in China," Journal of Corporate Finance, Elsevier, vol. 17(4), pages 1176-1199, September.
    17. Peterson, David R. & Smedema, Adam R., 2011. "The return impact of realized and expected idiosyncratic volatility," Journal of Banking & Finance, Elsevier, vol. 35(10), pages 2547-2558, October.
    18. Verrecchia, Robert E., 1983. "Discretionary disclosure," Journal of Accounting and Economics, Elsevier, vol. 5(1), pages 179-194, April.
    19. Bhagat, Sanjai & Bolton, Brian, 2008. "Corporate governance and firm performance," Journal of Corporate Finance, Elsevier, vol. 14(3), pages 257-273, June.
    20. Paul J. Irvine & Jeffrey Pontiff, 2009. "Idiosyncratic Return Volatility, Cash Flows, and Product Market Competition," The Review of Financial Studies, Society for Financial Studies, vol. 22(3), pages 1149-1177.
    21. Anup Agrawal & Charles R. Knoeber, "undated". "Firm Performance and Mechanisms to Control Agency Problems between Managers and Shareholders (Revision of 29-94)," Rodney L. White Center for Financial Research Working Papers 8-96, Wharton School Rodney L. White Center for Financial Research.
    22. Healy, Paul M. & Palepu, Krishna G., 2001. "Information asymmetry, corporate disclosure, and the capital markets: A review of the empirical disclosure literature," Journal of Accounting and Economics, Elsevier, vol. 31(1-3), pages 405-440, September.
    23. Robert M. Bushman & Joseph D. Piotroski & Abbie J. Smith, 2004. "What Determines Corporate Transparency?," Journal of Accounting Research, Wiley Blackwell, vol. 42(2), pages 207-252, May.
    24. X. Frank Zhang, 2006. "Information Uncertainty and Stock Returns," Journal of Finance, American Finance Association, vol. 61(1), pages 105-137, February.
    25. Andres, Pablo de & Vallelado, Eleuterio, 2008. "Corporate governance in banking: The role of the board of directors," Journal of Banking & Finance, Elsevier, vol. 32(12), pages 2570-2580, December.
    26. Joseph Ooi & Jingliang Wang & James Webb, 2009. "Idiosyncratic Risk and REIT Returns," The Journal of Real Estate Finance and Economics, Springer, vol. 38(4), pages 420-442, May.
    27. Berger, Philip G & Ofek, Eli & Yermack, David L, 1997. "Managerial Entrenchment and Capital Structure Decisions," Journal of Finance, American Finance Association, vol. 52(4), pages 1411-1438, September.
    28. Jensen, Michael C. & Meckling, William H., 1976. "Theory of the firm: Managerial behavior, agency costs and ownership structure," Journal of Financial Economics, Elsevier, vol. 3(4), pages 305-360, October.
    29. Stijn Claessens, 2006. "Corporate Governance and Development," The World Bank Research Observer, World Bank, vol. 21(1), pages 91-122.
    30. David Scharfstein, 1988. "Product-Market Competition and Managerial Slack," RAND Journal of Economics, The RAND Corporation, vol. 19(1), pages 147-155, Spring.
    31. Datta, Sudip & Iskandar-Datta, Mai & Singh, Vivek, 2013. "Product market power, industry structure, and corporate earnings management," Journal of Banking & Finance, Elsevier, vol. 37(8), pages 3273-3285.
    32. Timothy J. Quigley & Donald C. Hambrick, 2012. "When the former ceo stays on as board chair: effects on successor discretion, strategic change, and performance," Strategic Management Journal, Wiley Blackwell, vol. 33(7), pages 834-859, July.
    33. Timotheos Angelidis, 2010. "Idiosyncratic Risk in Emerging Markets," The Financial Review, Eastern Finance Association, vol. 45(4), pages 1053-1078, November.
    34. Bin Liu & Amalia Di Iorio, 2016. "The pricing of idiosyncratic volatility: An Australian study," Australian Journal of Management, Australian School of Business, vol. 41(2), pages 353-375, May.
    35. Lucian Arye Bebchuk & Jesse M. Fried, 2003. "Executive Compensation as an Agency Problem," Journal of Economic Perspectives, American Economic Association, vol. 17(3), pages 71-92, Summer.
    36. David Roodman, 2006. "How to Do xtabond2," North American Stata Users' Group Meetings 2006 8, Stata Users Group.
    37. Paul J. Irvine & Jeffrey Pontiff, 2009. "Idiosyncratic Return Volatility, Cash Flows, and Product Market Competition," The Review of Financial Studies, Society for Financial Studies, vol. 22(3), pages 1149-1177, March.
    38. Mark H. Lang & Karl V. Lins & Darius P. Miller, 2004. "Concentrated Control, Analyst Following, and Valuation: Do Analysts Matter Most When Investors Are Protected Least?," Journal of Accounting Research, Wiley Blackwell, vol. 42(3), pages 589-623, June.
    39. Fama, Eugene F. & French, Kenneth R., 1993. "Common risk factors in the returns on stocks and bonds," Journal of Financial Economics, Elsevier, vol. 33(1), pages 3-56, February.
    40. Barry, Christopher B. & Brown, Stephen J., 1985. "Differential Information and Security Market Equilibrium," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 20(4), pages 407-422, December.
    41. Anup Agrawal & Charles R. Knoeber, "undated". "Firm Performance and Mechanisms to Control Agency Problems between Managers and Shareholders (Revision of 29-94)," Rodney L. White Center for Financial Research Working Papers 08-96, Wharton School Rodney L. White Center for Financial Research.
    42. William S. Schulze & Michael H. Lubatkin & Richard N. Dino & Ann K. Buchholtz, 2001. "Agency Relationships in Family Firms: Theory and Evidence," Organization Science, INFORMS, vol. 12(2), pages 99-116, April.
    43. Zattoni,Alessandro & Judge,William (ed.), 2012. "Corporate Governance and Initial Public Offerings," Cambridge Books, Cambridge University Press, number 9781107016866.
    44. Bebchuk, Lucian A. & Fried, Jesse M., 2003. "Executive Compensation as an Agency Problem," Berkeley Olin Program in Law & Economics, Working Paper Series qt81q3136r, Berkeley Olin Program in Law & Economics.
    45. Chang, Eric C. & Dong, Sen, 2006. "Idiosyncratic volatility, fundamentals, and institutional herding: Evidence from the Japanese stock market," Pacific-Basin Finance Journal, Elsevier, vol. 14(2), pages 135-154, April.
    46. Manuel Arellano & Stephen Bond, 1991. "Some Tests of Specification for Panel Data: Monte Carlo Evidence and an Application to Employment Equations," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 58(2), pages 277-297.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Hasan, Mostafa Monzur & Habib, Ahsan, 2017. "Firm life cycle and idiosyncratic volatility," International Review of Financial Analysis, Elsevier, vol. 50(C), pages 164-175.
    2. Ge, Yuanjing & Guo, Haifeng & Fung, Hung-Gay & Guang, Kuncheng, 2019. "CEO effects on the IPO market under different policy regimes: Evidence from the Chinese SME board," International Review of Economics & Finance, Elsevier, vol. 63(C), pages 163-175.
    3. Shahab, Yasir & Ntim, Collins G. & Ullah, Farid & Yugang, Chen & Ye, Zhiwei, 2020. "CEO power and stock price crash risk in China: Do female directors' critical mass and ownership structure matter?," International Review of Financial Analysis, Elsevier, vol. 68(C).
    4. Liu, Hao & Zhang, Qun, 2021. "Firm age and realized idiosyncratic return volatility in China: The role of short-sales constraints," International Review of Financial Analysis, Elsevier, vol. 75(C).
    5. Frankovic, Jozo & Liu, Bin & Suardi, Sandy, 2022. "On spillover effects between cryptocurrency-linked stocks and the cryptocurrency market: Evidence from Australia," Global Finance Journal, Elsevier, vol. 54(C).
    6. Shahzad, Farrukh & Fareed, Zeeshan & Wang, Zhenkun & Shah, Syed Ghulam Meran, 2020. "Do idiosyncratic risk, market risk, and total risk matter during different firm life cycle stages?," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 537(C).
    7. Bin Liu & Monica Tan & Marie-Anne Cam, 2019. "Reinvestigate the Bid–Ask Bounce Effect and Pricing of Idiosyncratic Volatility: The Case of the Australian Market," Review of Pacific Basin Financial Markets and Policies (RPBFMP), World Scientific Publishing Co. Pte. Ltd., vol. 22(01), pages 1-23, March.
    8. Habiba Al-Shaer & Khaldoon Albitar & Jia Liu, 2023. "CEO power and CSR-linked compensation for corporate environmental responsibility: UK evidence," Review of Quantitative Finance and Accounting, Springer, vol. 60(3), pages 1025-1063, April.
    9. Ahmad, Sardar & Akbar, Saeed & Halari, Anwar & Shah, Syed Zubair, 2021. "Organizational non-compliance with principles-based governance provisions and corporate risk-taking," International Review of Financial Analysis, Elsevier, vol. 78(C).
    10. Subhan Ullah & Sardar Ahmad & Saeed Akbar & Devendra Kodwani & Jane Frecknall‐Hughes, 2021. "Governance disclosure quality and market valuation of firms in UK and Germany," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 26(4), pages 5031-5055, October.
    11. Yi-Shu Wang & Ting-Chen & Zhen-Jia-Liu, 2020. "The Relationship between Accounting Information Quality and Idiosyncratic Volatility: An Empirical Study on Chinese A-Share Listed Companies," Eurasian Journal of Business and Management, Eurasian Publications, vol. 8(2), pages 150-166.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Balachandran, Balasingham & Faff, Robert, 2015. "Corporate governance, firm value and risk: Past, present, and future," Pacific-Basin Finance Journal, Elsevier, vol. 35(PA), pages 1-12.
    2. Chongwoo Choe & Gloria Tian & Xiangkang Yin, 2008. "Managerial Power, Stock-Based Compensation, And Firm Performance: Theory And Evidence," Monash Economics Working Papers 21/08, Monash University, Department of Economics.
    3. mamatzakis, em, 2014. "The effect of corporate governance on the performance of US investment banks," MPRA Paper 60198, University Library of Munich, Germany.
    4. Chrisostomos Florackis & Aydin Ozkan, 2009. "The Impact of Managerial Entrenchment on Agency Costs: An Empirical Investigation Using UK Panel Data," European Financial Management, European Financial Management Association, vol. 15(3), pages 497-528, June.
    5. Hui Liang James & Hongxia Wang, 2021. "Independent director tenure and dividends," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 48(5-6), pages 1057-1091, May.
    6. Syrine Sassi & Narjess Toumi, 2018. "Product market competition and analyst following," Journal of Management & Governance, Springer;Accademia Italiana di Economia Aziendale (AIDEA), vol. 22(1), pages 55-88, March.
    7. James, Hui & Benson, Bradley W. & Wu, Chen (Ken), 2017. "Does CEO ownership affect payout policy? Evidence from using CEO scaled wealth-performance sensitivity," The Quarterly Review of Economics and Finance, Elsevier, vol. 65(C), pages 328-345.
    8. Ho, Simon S.M. & Li, Annie Yuansha & Tam, Kinsun & Tong, Jamie Y., 2016. "Ethical image, corporate social responsibility, and R&D valuation," Pacific-Basin Finance Journal, Elsevier, vol. 40(PB), pages 335-348.
    9. Rahman, Dewan & Kabir, Muhammad & Oliver, Barry, 2021. "Does exposure to product market competition influence insider trading profitability?," Journal of Corporate Finance, Elsevier, vol. 66(C).
    10. Paul McGuinness & Kevin Lam & João Vieito, 2015. "Gender and other major board characteristics in China: Explaining corporate dividend policy and governance," Asia Pacific Journal of Management, Springer, vol. 32(4), pages 989-1038, December.
    11. Ammari, Aymen & Bouteska, Ahmed & Regaieg, Boutheina, 2016. "CEO Entrenchment and Performance: New Evidence Using Nonlinear Principal Component Analysis," MPRA Paper 75529, University Library of Munich, Germany.
    12. Mehmet Levent Erdaş & Emel Bachá Sımoes, 2020. "The Relationship between Audit Mechanisms and Dividend Payout Policy within the Framework of Corporate Governance: The Case of Turkey," Journal of Economy Culture and Society, Istanbul University, Faculty of Economics, vol. 62(62), pages 255-284, December.
    13. Mehmet Levent Erdaş & Emel Bachá Sımoes, 2020. "The Relationship between Audit Mechanisms and Dividend Payout Policy within the Framework of Corporate Governance: The Case of Turkey," Journal of Economy Culture and Society, Istanbul University, Faculty of Economics, vol. 62(0), pages 255-284, December.
    14. Armstrong, Christopher S. & Guay, Wayne R. & Weber, Joseph P., 2010. "The role of information and financial reporting in corporate governance and debt contracting," Journal of Accounting and Economics, Elsevier, vol. 50(2-3), pages 179-234, December.
    15. Surjit Tinaikar, 2014. "Voluntary disclosure and ownership structure: an analysis of dual class firms," Journal of Management & Governance, Springer;Accademia Italiana di Economia Aziendale (AIDEA), vol. 18(2), pages 373-417, May.
    16. Georgeta Vintila & Stefan Cristian Gherghina, 2013. "Board of Directors Independence and Firm Value: Empirical Evidence Based on the Bucharest Stock Exchange Listed Companies," International Journal of Economics and Financial Issues, Econjournals, vol. 3(4), pages 885-900.
    17. Shkendije Himaj, 2014. "Corporate Governance in Banks and its Impact on Risk and Performance: Review of Literature on the Selected Governance Mechanisms," Journal of Central Banking Theory and Practice, Central bank of Montenegro, vol. 3(3), pages 53-85.
    18. Brockman, Paul & Guo, Tao & Vivero, Maria Gabriela & Yu, Wayne, 2022. "Is idiosyncratic risk priced? The international evidence," Journal of Empirical Finance, Elsevier, vol. 66(C), pages 121-136.
    19. Ana Isabel Ramos Domingues & António de Melo da Costa Cerqueira & Elísio Fernando Moreira Brandão, 2016. "Idiosyncratic Volatility and Earnings Quality: Evidence from United Kingdom," FEP Working Papers 579, Universidade do Porto, Faculdade de Economia do Porto.
    20. Chrisostomos Florackis & Aydin Ozkan, 2009. "Managerial incentives and corporate leverage: evidence from the United Kingdom," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 49(3), pages 531-553, September.

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eee:finana:v:48:y:2016:i:c:p:21-30. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Catherine Liu (email available below). General contact details of provider: http://www.elsevier.com/locate/inca/620166 .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.