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Boards, CEO entrenchment, and the cost of capital

Journal

Journal of Financial Economics

Subject

Finance

Publishing details

Journal of Financial Economics 2013 Vol 110:3 p 680-695

Authors / Editors

Dow J

Biographies

James Dow

Publication Year

2013

Abstract

Existing research on chief executive officer (CEO) turnover focuses on CEO ability. This paper argues that board ability is also important. Corporate boards are reluctant to replace CEOs, as this makes financing expensive by sending a negative signal about board ability. Entrenchment in this model does not result from CEO power, or from agency problems. Entrenchment is mitigated when there are more assets-in-place relative to investment opportunities. The paper also compares public and private equity. Private ownership eliminates CEO entrenchment, but market signals improve investment decisions. Finally, the model implies that board choice in publicly listed firms will be conservative.

Keywords

Managerial entrenchment; Cost of capital; Corporate boards; CEO turnover

Available on ECCH

No


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