Insular Decision Making in the Board Room: Why Boards Retain and Hire Substandard CEOs
This paper explores one reason why a corporate board often fails to replace a substandard CEO. I consider the situation in which the incumbent CEO and direscotrs make decisions in the absence of the new CEO. I show that in this situation, which is common in practice, the board and the CEO end up maximizing the expected utilities of the negotiating parties that do not include the expected utility of the potential CEO. This sometimes results in the retention of an inefficient CEO. Moreover, I argue that this same logic provides a theoretical explanation for how a new CEO is chosen in relation to both the voluntary and enforced replacement of an existing CEO. Specifically, the equilibrium succession policy may depart from the optimum succession policy; that is, the optimum from the shareholders' perspective.
|Date of creation:||Jan 2010|
|Date of revision:|
|Contact details of provider:|| Postal: Hongo 7-3-1, Bunkyo-ku, Tokyo 113-0033|
Web page: http://www.cirje.e.u-tokyo.ac.jp/index.html
More information through EDIRC
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Oliver E. Williamson, 2008. "Corporate Boards of Directors: In Principle and in Practice," Journal of Law, Economics and Organization, Oxford University Press, vol. 24(2), pages 247-272, October.
- Agrawal, Anup & Knoeber, Charles R. & Tsoulouhas, Theofanis, 2006.
"Are outsiders handicapped in CEO successions?,"
Journal of Corporate Finance,
Elsevier, vol. 12(3), pages 619-644, June.
- Laux, Volker, 2012. "Stock option vesting conditions, CEO turnover, and myopic investment," Journal of Financial Economics, Elsevier, vol. 106(3), pages 513-526.
- Raheja, Charu G., 2005. "Determinants of Board Size and Composition: A Theory of Corporate Boards," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 40(02), pages 283-306, June.
- Benjamin E. Hermalin, 2005. "Trends in Corporate Governance," Journal of Finance, American Finance Association, vol. 60(5), pages 2351-2384, October.
- Chung, Kee H. & Elder, John & Kim, Jang-Chul, 2010. "Corporate Governance and Liquidity," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 45(02), pages 265-291, April.
- Andres Almazan & Javier Suarez, 2003. "Entrenchment and Severance Pay in Optimal Governance Structures," Journal of Finance, American Finance Association, vol. 58(2), pages 519-548, 04.
- Aghion, Philippe & Bolton, Patrick, 1987. "Contracts as a Barrier to Entry," American Economic Review, American Economic Association, vol. 77(3), pages 388-401, June.
- Milton Harris & Artur Raviv, 2010. "Control of Corporate Decisions: Shareholders vs. Management," Review of Financial Studies, Society for Financial Studies, vol. 23(11), pages 4115-4147, November.
- Roman Inderst & Holger M. Mueller, 2010.
"CEO Replacement Under Private Information,"
Review of Financial Studies,
Society for Financial Studies, vol. 23(8), pages 2935-2969, August.
- Rosenstein, Stuart & Wyatt, Jeffrey G., 1990. "Outside directors, board independence, and shareholder wealth," Journal of Financial Economics, Elsevier, vol. 26(2), pages 175-191, August.
- Renée B. Adams & Daniel Ferreira, 2007. "A Theory of Friendly Boards," Journal of Finance, American Finance Association, vol. 62(1), pages 217-250, 02.
- David Clutterbuck, 1998. "Handing over the reins: should the CEO's successor be an insider or an outsider?," Corporate Governance: An International Review, Wiley Blackwell, vol. 6(2), pages 78-85, 04.
When requesting a correction, please mention this item's handle: RePEc:tky:fseres:2010cf710. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (CIRJE administrative office)
If references are entirely missing, you can add them using this form.