Effects of CEO power: evidence from labor-friendly practice, customer relationships, and investment efficiency
This thesis explores some of the key corporate governance debates and provides empirical evidence on those issues. It consists of three studies. The first study explores the benefits and costs of granting more power to Chief Executive Officers (CEOs) and examines whether a firm with a powerful CEO is associated with a greater investment in labor-friendly policy. A sample of 18,814 firm-year observations from 1996–2016 is used to examine this nexus, with the result showing that firms with powerful CEOs invest less in labor-friendly programs. However, this effect is attenuated for firms in some industries, such as those that are highly competitive, those with a high level of innovation intensity, and those with high labor bargaining power. Policies emphasizing friendliness towards employees are found to enhance firm value in highly competitive industries, in innovation-intensive industries, and in union-intensive industries. The findings thus underscore the importance of industry heterogeneity in understanding the relationship between CEO power and labor-friendly policy. The second study examines the impact of supplier firms’ investment in labor-welfare programs on customer–supplier relationships. Based on a sample of 17,190 United States (US) firm-year observations from 1996–2016, the study finds that suppliers’ employee-friendly practices foster customer–supplier relationship longevity, particularly when suppliers produce a unique product, market competition is high, customers’ switching cost is low, and customers are employee friendly. Further analysis shows that the relationships between suppliers and customers, built through investment in employee-friendly policy, pays off when the market suffers a negative shock. Hence, the result suggests that suppliers’ employee friendliness is a key determinant of customer–supplier relationship longevity. In the third study, the association between CEO power and investment efficiency is examined, distinguishing two different situations, overinvestment and underinvestment. It is found that CEO power distorts firm investment efficiency and that this result is attributed to overinvestment. Moreover, asymmetric information explains the CEO power–investment efficiency nexus. Further analysis shows that the negative effect of CEO power on firm investment efficiency and overinvestment is reduced by the Sarbanes–Oxley Act of 2002 (SOX).