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Micheal

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Is CEO Power Bad?
E. Han Kim and Yao Lu1

Abstract Recent evidence suggests that CEO power reduces shareholder value and the efficacy of incentive pay systems. To better understand how the power affects firm governance and performance, we decompose CEO power into three dimensions--structural, ability based, and ownership related. While structural power is indeed harmful--it is associated with higher managerial entrenchment, lower pay for performance sensitivity (PPS), and weaker firm performance--its impact on firm performance is benign when CEO power is restrained by strong external governance mechanisms. Concentration of ability based power in CEO appears to enhance firm performance, but only when external governance is strong. CEO share ownership (as independent variable) shows a U-shaped relation with entrenchment, and -shaped relations with PPS and performance. These results imply that ownership power arising at a high level of share ownership negates the beneficial effects of aligning CEO-shareholder interests through cash flow rights.

November 10, 2008 JEL classification: G30, G34, J 33, L25, M52,G32, Keywords: CEO power, managerial entrenchment, Pay for Performance Sensitivity, Firm performance, Share ownership, CEO Centrality
1

Both are at Ross School of Business, University of Michigan, Ann Arbor, Michigan 48109. Email: ehkim@umich.edu and

yaolu@umich.edu. We have benefitted from helpful comments and suggestions from Sugato Bhattacharyya, Amy Dittmar, Luo Jiang, Jin-Mo Kim, John McConnell, Adair Morse, Amiyatosh Purnannandam, and participants of finance seminars at Rutgers University and State University of New York at Buffalo, University of Michigan, and 2008 China International Conference in Finance, and corporate strategy seminar at University of Michigan. We acknowledge financial support from Mitsui Life Financial Research Center at the

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