10 April 2019

ECGI: Firms’ rationales for CEO duality - evidence from a mandatory disclosure regulation

ECGI's paper is the first to present evidence on the reasons that firms state for their board leadership structure. According to results, the stock market considers a “one-size-fits-all” approach to CEO duality inappropriate.

CEO duality – the practice of combining the roles of the CEO and chairman of the board – has been the topic of one of the longest debates in corporate governance. While a majority of firms in the S&P 500 index combine the two roles, there is frequent pressure on firms from investors and governance experts to separate the roles. Yet, many shareholder proposals pushing for this separation do not receive majority support, indicating disagreement among shareholders about the value of CEO duality. Such disagreement is consistent with the inconclusive literature on the relation between CEO duality and firm performance (for a review, see e.g. Krause, Semadeni, and Cannella, 2014). Hence, there is a need to better understand why firms combine or separate the roles of the CEO and chairman.

This paper exploits a 2009 amendment to Regulation S-K requiring public firms to disclose the reasons for combining (separating) the roles of CEO and chairman. We provide unique evidence on S&P 500 companies’ first-time disclosure of the reasons behind their board leadership structure. Thereby, we improve our understanding of why firms have opted for or against CEO duality. To assess the value implications and informativeness of the stated reasons, we also examine the stock market reaction to firms’ disclosures.

Our textual analysis suggests that firms with CEO duality report significantly more distinct reasons and use more words, including more positive and negative ones. These patterns indicate that firms are aware of the controversy surrounding CEO duality and, hence, cater to investors’ needs for more information regarding their specific reasons for having duality.

Finally, the study of the stock market reaction to firms’ first-time disclosure of their reasons for their adopted leadership structure suggests that these reasons differ with respect to their informativeness for investors and that CEO duality has implications for shareholder value.

Full paper

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