Abstract - CEO Centrality

We investigate the relationship between CEO centrality – the relative importance of the
CEO within the top executive team in terms of ability, contribution, or power – and the value and behavior of public firms. Our proxy for CEO centrality is the fraction of the top-five
compensation captured by the CEO. We find that CEO centrality is negatively associated with
firm value (as measured by industry-adjusted Tobin's Q). Greater CEO centrality is also
correlated with (i) lower (industry-adjusted) accounting profitability, (ii) lower stock returns
accompanying acquisitions announced by the firm and higher likelihood of a negative stock
return accompanying such announcements, (iii) greater tendency to reward the CEO for luck in
the form of positive industry-wide shocks, (iv) lower likelihood of CEO turnover controlling for
performance, and (v) lower firm-specific variability of stock returns over time. Overall, our results indicate that differences in CEO centrality are an aspect of firm management and
governance that deserves the attention of researchers.

Urs Peyer (speaker), Lucian Bebchuk, Martijn Cremers
06.Nov 2007

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