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Boards, CEO entrenchment, and the cost of capital

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  • Dow, James

Abstract

Existing research on chief executive officer (CEO) turnover focuses on CEO ability. This paper argues that board ability is also important. Corporate boards are reluctant to replace CEOs, as this makes financing expensive by sending a negative signal about board ability. Entrenchment in this model does not result from CEO power, or from agency problems. Entrenchment is mitigated when there are more assets-in-place relative to investment opportunities. The paper also compares public and private equity. Private ownership eliminates CEO entrenchment, but market signals improve investment decisions. Finally, the model implies that board choice in publicly listed firms will be conservative.

Suggested Citation

  • Dow, James, 2013. "Boards, CEO entrenchment, and the cost of capital," Journal of Financial Economics, Elsevier, vol. 110(3), pages 680-695.
    • Handle: RePEc:eee:jfinec:v:110:y:2013:i:3:p:680-695
    DOI: 10.1016/j.jfineco.2013.08.009
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    2. Donaldson, Jason & Piacentino, Giorgia & Malenko, Nadya, 2017. "Deadlock on the Board," CEPR Discussion Papers 12503, C.E.P.R. Discussion Papers.
    3. Hermalin, Benjamin E. & Weisbach, Michael S., 2014. "Understanding Corporate Governance through Learning Models of Managerial Competence," Working Paper Series 2014-04, Ohio State University, Charles A. Dice Center for Research in Financial Economics.
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    5. Mike Adams & Wei Jiang & Siqi Liu, 2025. "Does risk management moderate the relationship between CEO power and corporate philanthropy?," Review of Quantitative Finance and Accounting, Springer, vol. 64(1), pages 53-87, January.

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    Keywords

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    JEL classification:

    • G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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