Powerful CEOs make ‘risky investment decisions’
Powerful CEOs are prone to making risky investment decisions at the expense of shareholder value, claims a new study.
Researchers from Glasgow Caledonian University, the University of Liverpool, Leeds Beckett University, and the University of Southampton analysed merger and acquisition deals involving 270 UK firms for a new paper published in the Review of Quantitative Finance and Accounting.
They found that CEOs, without strong board oversight, can take investment decisions to promote their self-interest and build their empires, negatively affecting post-merger performance.
The study concludes that board size, independence, and gender diversity can help mitigate the excesses of a strong CEO.
Dr Sanjukta Brahma, Senior Lecturer in Financial Services at Glasgow Caledonian University, said: "Our results provide evidence that CEO power leads to poor post-merger performance, suggesting that merger and acquisition decisions may be driven by managerial motives rather than shareholder wealth maximisation.
"We demonstrate that CEO power constitutes one of the key determinants influencing a firm's strategic choices and explaining poor merger and acquisition performance. It may be difficult for a powerful CEO to take the point of view of other senior managers.
"The findings suggest that while CEO power unequivocally leads to higher risk-taking in investments and poor financial performance for acquirers, the effects of CEO power may still be somewhat constrained by strong internal corporate governance."
CEO power and post-merger performance in the UK: the moderating effects of corporate governance mechanisms features in the July edition of the Review of Quantitative Finance and Accounting.