CEO duality, agency costs, and internal capital allocation efficiency

Aktas, N.; Andreou, P.C.; Karasamani, I.; Philip, D.

doi:10.1111/1467-8551.12277

CEO duality, agency costs, and internal capital allocation efficiency

Aktas, N.; Andreou, P.C.; Karasamani, I.; Philip, D.

Authors

N. Aktas

Professor Panayiotis Andreou panayiotis.andreou@durham.ac.uk
Professor

I. Karasamani

Professor Dennis Philip dennis.philip@durham.ac.uk
Professor

Abstract

This study examines the impact of CEO duality on firms’ internal capital allocation efficiency. We observe that when the CEO is also chair of the board, diversified firms make inefficient investments, as they allocate more capital to business segments with relatively low growth opportunities over segments with high growth opportunities. The adverse impact of CEO duality on investment efficiency prevails only among firms that face high agency problems, as captured by high free cash flows, staggered board structure and low board independence. Depending on the severity of the agency problem, CEO duality is associated with a decrease in industry-adjusted investment in high-growth segments of 1% to 2.1% over the following year, relative to that in low-growth segments. However, CEOs’ equity-based compensation curbs the negative effect of CEO duality on internal capital allocation efficiency. Overall, the findings of this study offer strong support for the agency theory and postulate the internal capital allocation policy as an important channel through which CEO duality lowers firm value in diversified firms.

Citation

Aktas, N., Andreou, P., Karasamani, I., & Philip, D. (2019). CEO duality, agency costs, and internal capital allocation efficiency. British Journal of Management, 30(2), 473-493. https://doi.org/10.1111/1467-8551.12277

Journal Article Type	Article
Acceptance Date	Nov 16, 2017
Online Publication Date	Jan 19, 2018
Publication Date	Apr 30, 2019
Deposit Date	Nov 17, 2017
Publicly Available Date	Jan 19, 2020
Journal	British Journal of Management
Print ISSN	1045-3172
Electronic ISSN	1467-8551
Publisher	Wiley
Peer Reviewed	Peer Reviewed
Volume	30
Issue	2
Pages	473-493
DOI	https://doi.org/10.1111/1467-8551.12277
Public URL	https://durham-repository.worktribe.com/output/1344006
Related Public URLs	https://doi.org/10.2139/ssrn.2865169

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Copyright Statement
Revised version This is the accepted version of the following article: Aktas, N., Andreou, P.C., Karasamani, I. & Philip, D. (2018). CEO duality, agency costs, and internal capital allocation efficiency. British Journal of Management 30(2): 473-493, which has been published in final form at https://doi.org/10.1111/1467-8551.12277. This article may be used for non-commercial purposes in accordance With Wiley Terms and Conditions for self-archiving.