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CEO DIRECTORS, EXECUTIVE INCENTIVES, AND CORPORATE STRATEGIC INITIATIVES

Authors


  • I am grateful for constructive comments by Lalitha Naveen (the referee), Anand Venkateswaran, Peng Xu, Roger King, Richard Hallquist, Lise Cragen, and seminar participants at Northeastern University and the 2008 Financial Management Association Asian meeting in Yokohama, Japan. I am grateful also for financial support from the Lloyd Mullin Research Fellowship.

Abstract

I study how directors who are chief executive officers (CEOs) of other firms affect board effectiveness. I find that CEOs are paid more and their compensation is less sensitive to firm performance when other CEOs serve as directors. This is not an employment risk premium because CEO directors are not associated with higher turnover-performance sensitivity. Also, CEO directors have no effect on corporate innovation but are associated with higher acquisition returns, especially for complex deals. My results suggest that the advisory benefits of CEO directors must be balanced against the distortions in executive incentives associated with their board service.

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