CEO Power and Firm Performance: A Test of the Life‐Cycle Theory*

Abstract

Abstract We examine the effects of corporate governance and monitoring mechanisms on the choice of board leadership structure and the value and performance of a firm according to the firm's life‐cycle changes. Employing a large and extensive sample during the 1995–2005 period, we find that the board leadership choice is associated with governance characteristics including board independence, managerial entrenchment, and CEO abilities measured by CEO age and CEO tenure after controlling for various firm characteristics. In addition, after correcting for the endogenous treatment effect, our results show that while CEO dualities‐i.e., CEO‐chair of the board or CEO‐nomination committee member — or CEO pluralities‐i.e., CEO‐chair of the board, and a chair or a member of the nomination committee‐positively influences firm value and performance in firm's early stage, CEO duality or CEO pluralities adversely influences firm value and operating performance in firm's late stage. These results are supportive of the life‐cycle theory, suggesting that CEO power concentration is beneficial in firms' early stage, but harmful in firm's late stage at which firms require check‐and‐balance as opposed to dictatorship. In addition, the impact of external monitoring by institutional ownership on firm value and performance is more effective than those of independent board and blockholders' ownership while the impact of Sarbane‐Oxley Act on firm performance is not significant.