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Bottom-Up Corporate Governance

Author

Listed:
  • Augustin Landier

    (TSE - Toulouse School of Economics - Toulouse School of Economics)

  • Julien Sauvagnat

    (TSE - Toulouse School of Economics - Toulouse School of Economics)

  • David Sraer

    () (Bendheim Center for Finance - Princeton University)

  • David Thesmar

    () (GREGH - Groupement de Recherche et d'Etudes en Gestion à HEC - HEC Paris - Ecole des Hautes Etudes Commerciales - CNRS - Centre National de la Recherche Scientifique)

Abstract

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.

Suggested Citation

  • Augustin Landier & Julien Sauvagnat & David Sraer & David Thesmar, 2012. "Bottom-Up Corporate Governance," Post-Print hal-01026127, HAL.
  • Handle: RePEc:hal:journl:hal-01026127
    DOI: 10.1093/rof/rfs020
    Note: View the original document on HAL open archive server: https://hal-hec.archives-ouvertes.fr/hal-01026127
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    References listed on IDEAS

    as
    1. Bebchuk, Lucian A. & Cohen, Alma, 2005. "The costs of entrenched boards," Journal of Financial Economics, Elsevier, vol. 78(2), pages 409-433, November.
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    3. Vafeas, Nikos, 1999. "Board meeting frequency and firm performance," Journal of Financial Economics, Elsevier, vol. 53(1), pages 113-142, July.
    4. 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.
    5. 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.
    6. Weisbach, Michael S., 1988. "Outside directors and CEO turnover," Journal of Financial Economics, Elsevier, vol. 20(1-2), pages 431-460, January.
    7. 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.
    8. Rachel M. Hayes & Paul Oyer & Scott Schaefer, 2006. "Coworker Complementarity and the Stability of Top-Management Teams," Journal of Law, Economics, and Organization, Oxford University Press, vol. 22(1), pages 184-212, April.
    9. Benjamin E. Hermalin & Michael S. Weisbach, 2003. "Boards of directors as an endogenously determined institution: a survey of the economic literature," Economic Policy Review, Federal Reserve Bank of New York, issue Apr, pages 7-26.
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    Citations

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    Cited by:

    1. Francesco Lippi & Fabiano Schivardi, 2014. "Corporate control and executive selection," Quantitative Economics, Econometric Society, vol. 5, pages 417-456, July.
    2. repec:kap:jbuset:v:142:y:2017:i:2:d:10.1007_s10551-015-2752-8 is not listed on IDEAS
    3. Ying Dou & Sidharth Sahgal & Emma Jincheng Zhang, 2015. "Should Independent Directors Have Term Limits? The Role of Experience in Corporate Governance," Financial Management, Financial Management Association International, vol. 44(3), pages 583-621, September.
    4. Troy D. Smith, 2015. "Private Equity Investment in India: Efficiency vs Expansion," Discussion Papers 15-011, Stanford Institute for Economic Policy Research.
    5. Jain, Pawan & Jiang, Christine & Mekhaimer, Mohamed, 2016. "Executives' horizon, internal governance and stock market liquidity," Journal of Corporate Finance, Elsevier, vol. 40(C), pages 1-23.
    6. Ahn, Seoungpil & Walker, Mark D., 2007. "Corporate governance and the spinoff decision," Journal of Corporate Finance, Elsevier, vol. 13(1), pages 76-93, March.
    7. Cioban (Lucan) Alexandra Narcisa, 2016. "The Influence Of The Corporate Governance Mechanisms And Audit Fees On The Financial Performance Measured With Roa," Annals - Economy Series, Constantin Brancusi University, Faculty of Economics, vol. 5, pages 20-31, October.
    8. Peter Hahn & Meziane Lasfer, 2011. "The compensation of non-executive directors: rationale, form, and findings," Journal of Management & Governance, Springer;Accademia Italiana di Economia Aziendale (AIDEA), vol. 15(4), pages 589-601, November.
    9. Tanja Artiga González & Markus Schmid & David Yermack, 2013. "Smokescreen: How Managers Behave When They Have Something To Hide," NBER Working Papers 18886, National Bureau of Economic Research, Inc.

    More about this item

    Keywords

    corporate; governance;

    JEL classification:

    • D23 - Microeconomics - - Production and Organizations - - - Organizational Behavior; Transaction Costs; Property Rights
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance

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