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Bottom-Up Corporate Governance

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  • Augustin Landier
  • Julien Sauvagnat
  • David Sraer
  • David Thesmar

Abstract

This article empirically relates the internal organization of a firm with decision making quality and corporate performance. We call "independent from the CEO" a top executive who joined the firm before the current CEO was appointed. In a very robust way, firms with a smaller fraction of independent executives exhibit (1) a lower level of profitability and (2) lower shareholder returns following large acquisitions. These results are unaffected when we control for traditional governance measures such as board independence or other well-studied shareholder friendly provisions. One interpretation is that "independently minded" top ranking executives act as a counter-power imposing strong discipline on their CEO, even though they are formally under his authority. Copyright 2013, Oxford University Press.

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Bibliographic Info

Article provided by European Finance Association in its journal Review of Finance.

Volume (Year): 17 (2013)
Issue (Month): 1 ()
Pages: 161-201

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Handle: RePEc:oup:revfin:v:17:y:2013:i:1:p:161-201

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References

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  1. Lucian Bebchuk & Alma Cohen, 2004. "The Costs of Entrenched Boards," NBER Working Papers 10587, National Bureau of Economic Research, Inc.
  2. Yermack, David, 1996. "Higher market valuation of companies with a small board of directors," Journal of Financial Economics, Elsevier, vol. 40(2), pages 185-211, February.
  3. Rachel M. Hayes & Paul Oyer & Scott Schaefer, 2006. "Coworker Complementarity and the Stability of Top-Management Teams," Journal of Law, Economics and Organization, Oxford University Press, vol. 22(1), pages 184-212, April.
  4. Weisbach, Michael S., 1988. "Outside directors and CEO turnover," Journal of Financial Economics, Elsevier, vol. 20(1-2), pages 431-460, January.
  5. Eric Van den Steen, 2005. "Organizational Beliefs and Managerial Vision," Journal of Law, Economics and Organization, Oxford University Press, vol. 21(1), pages 256-283, April.
  6. Benjamin E. Hermalin & Michael S. Weisbach, 2003. "Boards of directors as an endogenously determined institution: a survey of the economic literature," Economic Policy Review, Federal Reserve Bank of New York, issue Apr, pages 7-26.
  7. Vafeas, Nikos, 1999. "Board meeting frequency and firm performance," Journal of Financial Economics, Elsevier, vol. 53(1), pages 113-142, July.
  8. Renée B. Adams & Heitor Almeida & Daniel Ferreira, 2005. "Powerful CEOs and Their Impact on Corporate Performance," Review of Financial Studies, Society for Financial Studies, vol. 18(4), pages 1403-1432.
  9. Kaplan, Steven N. & Minton, Bernadette A., 1994. "Appointments of outsiders to Japanese boards: Determinants and implications for managers," Journal of Financial Economics, Elsevier, vol. 36(2), pages 225-258, October.
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Cited by:
  1. Artiga González, Tanja & Schmid, Markus & Yermack, David, 2013. "Smokescreen: How Managers Behave When They Have Something to Hide," Working Papers on Finance 1309, University of St. Gallen, School of Finance.
  2. Peter Hahn & Meziane Lasfer, 2011. "The compensation of non-executive directors: rationale, form, and findings," Journal of Management and Governance, Springer, vol. 15(4), pages 589-601, November.
  3. Ahn, Seoungpil & Walker, Mark D., 2007. "Corporate governance and the spinoff decision," Journal of Corporate Finance, Elsevier, vol. 13(1), pages 76-93, March.
  4. Lippi, Francesco & Schivardi, Fabiano, 2010. "Corporate Control and Executive Selection," CEPR Discussion Papers 8031, C.E.P.R. Discussion Papers.

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