Corporate Diversification and CEO Dismissal: The impact of CEO and Board Attributes
Speaker
Abstract
| Prior literature has shown that a CEO may have incentives to expand the strategic scope of the firm, which in turn may have value-reducing consequences for the firm’s shareholders. In this paper, drawing on agency and upper echelons perspectives, we develop a theoretical framework linking corporate diversification strategy to CEO dismissal. It is investigated whether a board of directors evaluates not only performance results but actual strategic choices. In the paper, we show that a board may intervene, not only in the ex-post evaluation of a CEO based on performance results, but it may have an agency-oriented, pre-conceived view of what are appropriate corporate strategies for shareholders, and subsequently evaluate the CEO based on her/his ex-ante strategic choices. The findings provide evidence that a CEO that pursues strategies aiming to increase the firm’s portfolio unrelatedness face greater likelihood to be dismissed by the firm’s board. However, this effect is diminished if the CEO has a finance/legal functional expertise, and/or the board comprises outside directors who are themselves CEOs in other companies. Thus, in the paper, we also demonstrate that experience-based CEO and board attributes matter in decreasing the control and discipline aspect of CEO-board relations. |
| Contact information: |
| Carolien Heintjes |
