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Why Do Firms Appoint CEOs as Outside Directors?

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  • Fahlenbrach, Rudiger

    (Ohio State U)

  • Low, Angie

    (Nanyang Technological U)

  • Stulz, Rene

    (Ohio State U)

Abstract

We examine the determinants of appointments of outside CEOs to boards and how these appointments impact the appointing companies. We find that CEOs are most likely to join boards of large established firms that are geographically close, pursue similar financial and investment policies, and have comparable governance mechanisms to their own firms. It is also more likely that CEOs join firms with low insider ownership and firms with boards that already have other CEO directors. Except for the case of board interlocks, there is no evidence supporting the view that CEO directors have any impact on the appointing firm during their tenure, either positively or negatively. Appointments of CEO directors do not have a significant impact on the appointing firm's operating performance, its decision-making, the compensation of its CEO, or on the monitoring of management by the board. However, operating performance drops significantly for CEO director appointments when the CEO of the appointing firm already sits on the board of the appointee's firm.

Suggested Citation

  • Fahlenbrach, Rudiger & Low, Angie & Stulz, Rene, 2008. "Why Do Firms Appoint CEOs as Outside Directors?," Working Paper Series 2008-10, Ohio State University, Charles A. Dice Center for Research in Financial Economics.
  • Handle: RePEc:ecl:ohidic:2008-10
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    References listed on IDEAS

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    JEL classification:

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

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