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CEOs and the Product Market: When Are Powerful CEOs Beneficial?

Published online by Cambridge University Press:  19 September 2018

Minwen Li ,
Yao Lu  and
Gordon M. Phillips
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Abstract

We examine whether industry product market conditions are important in assessing the benefits and costs of chief executive officer (CEO) power. We find that firms are more likely to have powerful CEOs in high demand product markets where firms are facing entry threats. In these markets, investors react favorably to announcements granting more power to CEOs, and CEO power is associated with higher market value, sales growth, investment, advertising, and the introduction of more new products. Our results remain significant when addressing the endogeneity of CEO power by instrumenting CEO power with past non-CEO executive and director sudden deaths.

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Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 54 , Issue 6 , December 2019 , pp. 2295 - 2326
Copyright
Copyright © Michael G. Foster School of Business, University of Washington 2018 

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Footnotes

1

We thank Renee Adams, Alex Edmans, Xavier Giroud, Jarrad Harford (the editor), John Matsusaka, Holger Mueller, Oguzhan Ozbas, Michael Weisbach (the referee), Jun Yang, and seminar participants at the University of Iowa, University of Michigan, Hong Kong University, Renmin University, University of Delaware, University of Exeter, University of International Business and Economics, Peking University, University of Pittsburgh, Southwestern University of Finance and Economics, the 2015 American Finance Association Meeting, and the 2015 China International Conference in Finance for helpful comments and suggestions. We also specially thank E. Han Kim for providing useful comments and sharing some data. Li acknowledges financial support from the National Science Foundation of China (Grant No. 71402078) and Tsinghua University Humanities and Social Science Research Project Promotion Fund (Grant No. 2013WKZD004). Lu acknowledges financial support from the National Science Foundation of China (Grant No. 71722001), Tsinghua University Humanities and Social Science Research Project Promotion Fund (Grant No. 2015THZWYY09), and the Mitsui Life Financial Research Center at the University of Michigan.

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