Number Two Executives: Bottom‐Up Monitoring

Zhichuan (Frank) Li

Journal of Business Finance & Accounting, 2025, vol. 52, issue 4, 2037-2061

Abstract: This article empirically examines the role of a firm's second‐in‐command in monitoring the chief executive officer (CEO) from the bottom up to mitigate agency problems. Although CEOs have long been the focus, little research has addressed No. 2 executive. This study provides a comprehensive understanding of these top executives and their roles in bottom‐up monitoring. The results suggest that (1) bottom‐up monitoring by No. 2 executives enhances firm value, (2) the effect is stronger in firms with weak corporate governance or poor CEO incentive alignment, (3) the effect is weaker when No. 2 is promoted internally or lacks experience, and (4) such monitoring becomes more critical in the post‐Sarbanes–Oxley (SOX) regulatory environment. Further analysis reveals that bottom‐up monitoring creates firm value by fostering a more transparent information environment, increasing CEO turnover‐performance sensitivity, and reducing the CEO's ability to pursue the “quiet life,” but has no effect on “empire building.”

Date: 2025
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