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Bottom-Up Corporate Governance

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

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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File URL: http://hdl.handle.net/10.1093/rof/rfs020
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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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  1. Lucian Bebchuk & Alma Cohen, 2004. "The Costs of Entrenched Boards," NBER Working Papers 10587, National Bureau of Economic Research, Inc.
  2. 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.
  3. 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.
  4. 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.
  5. Rachel M. Hayes & Paul Oyer & Scott Schaefer, 2004. "Co-Worker Complemetarity and the Stability of Top Management Teams," NBER Working Papers 10350, National Bureau of Economic Research, Inc.
  6. Weisbach, Michael S., 1988. "Outside directors and CEO turnover," Journal of Financial Economics, Elsevier, vol. 20(1-2), pages 431-460, January.
  7. 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.
  8. Vafeas, Nikos, 1999. "Board meeting frequency and firm performance," Journal of Financial Economics, Elsevier, vol. 53(1), pages 113-142, July.
  9. Benjamin E. Hermalin & Michael S. Weisbach, 2001. "Boards of Directors as an Endogenously Determined Institution: A Survey of the Economic Literature," NBER Working Papers 8161, National Bureau of Economic Research, Inc.
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