Bottom-Up Corporate Governance

Augustin Landier (1) , Julien Sauvagnat (1) , David Sraer (2) , David Thesmar (3)

1 TSE-R - Toulouse School of Economics
2 Bendheim Center for Finance
3 GREGH - Groupement de Recherche et d'Etudes en Gestion à HEC

This article empirically relates the internal organization of a firm with decision making quality and corporate performance. We call "independent from the CEO" a top executive who joined the firm before the current CEO was appointed. In a very robust way, firms with a smaller fraction of independent executives exhibit (1) a lower level of profitability and (2) lower shareholder returns following large acquisitions. These results are unaffected when we control for traditional governance measures such as board independence or other well-studied shareholder friendly provisions. One interpretation is that "independently minded" top ranking executives act as a counter-power imposing strong discipline on their CEO, even though they are formally under his authority.

Keywords: corporate; governance

Domains: Humanities and Social Sciences; Business administration

Augustin Landier, Julien Sauvagnat, David Sraer, David Thesmar. Bottom-Up Corporate Governance. Review of Finance, 2012, 17 (1), pp.161-201. ⟨10.1093/rof/rfs020⟩. ⟨hal-01026127⟩