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Powerful CEOs and investment efficiency

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  • Chowdhury, Md Raihan Uddin
  • Xie, Feixue
  • Hasan, Md Mahmudul

Abstract

This study investigates whether chief executive officers (CEOs) with excessive power make efficient investment decisions. We employ a comprehensive measure of CEO power and find that highly powerful CEOs tend to reduce investment efficiency by increasing overinvestment. This inefficiency is more pronounced with strong information asymmetry, agency problems, and product market competition. We also find that a firm's operation complexity and the presence of effective internal and external governance can help mitigate investment inefficiency; however, when most independent directors are co-opted or powerful CEOs are recruited from outside the firm, the investment inefficiency deteriorates. Moreover, inefficiency and overinvestment tend to increase with CEO tenure, the level of CEO power, and financial constraints faced by the firm. These findings shed light on the complex dynamics between CEO power, investment decisions, and various factors influencing their effectiveness.

Suggested Citation

  • Chowdhury, Md Raihan Uddin & Xie, Feixue & Hasan, Md Mahmudul, 2023. "Powerful CEOs and investment efficiency," Global Finance Journal, Elsevier, vol. 58(C).
    • Handle: RePEc:eee:glofin:v:58:y:2023:i:c:s1044028323000819
    DOI: 10.1016/j.gfj.2023.100886
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    JEL classification:

    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G30 - Financial Economics - - Corporate Finance and Governance - - - General
    • G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Fixed Investment and Inventory Studies
    • G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance
    • M12 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Business Administration - - - Personnel Management; Executives; Executive Compensation

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