Dr. Aloke Ghosh gives a presentation at The University of Memphis Business School in June 2009. During this presentation, Professor Ghosh discusses the prospect of a CEO also serving as the Chair of the Board.
ABSTRACT: A fundamental concern is that CEOs serving as chairs of the board (Chair) might use their power to “extract rents.” In contrast, under efficient contracting theory, depending on the firms’ information and contracting environment, firms can also benefit from one individual holding both positions. Consistent with efficient contracting theory, we find that the prospect of a CEO serving as the Chair increases with the riskiness of a firm, industry concentration, CEOs’ ability and track record, and stronger governance. We also directly test the rent extraction hypothesis by examining whether CEOs use their managerial power from holding the two top positions to derive personal benefits. We find no evidence of adverse consequences from CEOs holding dual positions in the form of excessively high CEO compensation, use of financial reporting discretion to manage earnings, or lower market valuations. There is also no evidence to suggest that CEOs with dual positions build empires through frequent acquisitions or that they pay less dividend. Finally, examination of the stock market returns around the announcement date indicates that investors do not react negatively to the news about an expansion or contraction in the role of a CEO, which is again inconsistent with the rent extraction theory. Overall, our results support the view that the organization of the leadership in U.S. firms is optimally determined for a typical large firm.by