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Why do firms appoint CEOs as outside directors?

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  • Fahlenbrach, Rüdiger
  • Low, Angie
  • Stulz, René M.

Abstract

Companies actively seek to appoint outside CEOs to their boards. Consistent with our matching theory of outside CEO board appointments, we show that such appointments have a certification benefit for the appointing firm. CEOs are more likely to join boards of large established firms that are geographically close, pursue similar financial and investment policies, and have comparable governance to their own firms. The first outside CEO director appointment has a higher stock-price reaction than the appointment of another outside director. Except for a decrease in operating performance following the appointment of an interlocked director, CEO directors do not affect the appointing firm's operating performance, decision-making, and CEO compensation.

Suggested Citation

  • Fahlenbrach, Rüdiger & Low, Angie & Stulz, René M., 2010. "Why do firms appoint CEOs as outside directors?," Journal of Financial Economics, Elsevier, vol. 97(1), pages 12-32, July.
    • Handle: RePEc:eee:jfinec:v:97:y:2010:i:1:p:12-32
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    More about this item

    Keywords

    Director independence New director appointment Director influence Interlocked boards Governance;

    JEL classification:

    • G30 - Financial Economics - - Corporate Finance and Governance - - - General

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