XXV Edition

1-2 December 2016"

Ceo Duality, Agency Costs, and Internal Capital Allocations

Isabella Karasamani, Cyprus University of Technology and Durham University
Aktas Nihat, WHU Otto Beisheim School of Management
Andreou Panayiotis C., Cyprus University of Technology and Durham University
Philip Dennis, Durham University

This study examines the impact of CEO duality on investment allocation efficiency and firm value. When a CEO is also the Chairman of the Board, as compared to firms where these roles are disjoint, we find that firms with such managerial decision power structures make more investments in businesses with low growth opportunities. Such capital (mis)allocations violate the internal capital market efficiency tenet, thus, negatively affecting investment efficiency. However, we observe that the adverse impact of the CEO-Chairman roles on investment efficiency prevails only in situations with accentuated agency costs as captured by low CEO compensation incentives. We also find that the marginal value of investment is lower in firms with CEO-Chairman roles combined, which is destructive for firm value. Overall, the evidence in this study highlights that capital allocation process is an important channel through which CEO duality creates agency costs that are detrimental to firm value, and supports the effectiveness of executive compensation in mitigating this negative effect.

Area: Efficiency and Productivity Analysis

Keywords: CEO duality; Agency costs; Capital allocation; Investment efficiency

Paper file

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