Powerful CEOs and investment efficiency

Md Raihan Uddin Chowdhury, Feixue Xie and Md Mahmudul Hasan

Global Finance Journal, 2023, vol. 58, issue C

Abstract: This study investigates whether chief executive officers (CEOs) with excessive power make efficient investment decisions. We employ a comprehensive measure of CEO power and find that highly powerful CEOs tend to reduce investment efficiency by increasing overinvestment. This inefficiency is more pronounced with strong information asymmetry, agency problems, and product market competition. We also find that a firm's operation complexity and the presence of effective internal and external governance can help mitigate investment inefficiency; however, when most independent directors are co-opted or powerful CEOs are recruited from outside the firm, the investment inefficiency deteriorates. Moreover, inefficiency and overinvestment tend to increase with CEO tenure, the level of CEO power, and financial constraints faced by the firm. These findings shed light on the complex dynamics between CEO power, investment decisions, and various factors influencing their effectiveness.

Keywords: Investment efficiency; Powerful CEOs; Information asymmetry; Agency problems; Corporate governance (search for similar items in EconPapers)
JEL-codes: G14 G30 G31 G34 M12 (search for similar items in EconPapers)
Date: 2023
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:glofin:v:58:y:2023:i:c:s1044028323000819

DOI: 10.1016/j.gfj.2023.100886

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