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The influence of learning and bargaining on CEO–chair duality: Evidence from firms that pass the baton

Narayanan Jayaraman, Vikram Nanda and Harley E. Ryan

Financial Management, 2022, vol. 51, issue 1, 297-350

Abstract: Some firms combine CEO and board chair positions after observing CEO performance. We propose that this approach, known as “passing the baton” (PTB), enables the board to learn about the ability and suitability of the CEO before awarding additional title of board chair. Consistent with learning, idiosyncratic stock‐return volatility declines following the CEO–chair combination. The market responds positively (Cumulative Abnormal Return (CAR) = 1.31%) to early promotions, suggesting that early promotions reveal directors’ private information about CEO quality. Compared to a matched benchmark, we observe no decline in firm's accounting performance in subsequent years. Although match‐adjusted stock returns begin to decline 2 years after combination in homogeneous industries, there is no stock‐return decline in heterogeneous industries where learning is more important. The evidence reveals the potential for entrenchment over time, but we find no evidence to suggest that CEO–chair combinations in PTB firms result from agency problems. Our results underscore the importance of balancing both learning and agency problems in corporate governance.

Date: 2022
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