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Article
Publication date: 13 May 2020

Henri Akono

This paper aims to examine how compensation committees perceive audit quality as indicated by audit firm tenure. Using the contracting weight attached to earnings and cash…

Abstract

Purpose

This paper aims to examine how compensation committees perceive audit quality as indicated by audit firm tenure. Using the contracting weight attached to earnings and cash flows in chief executive officer (CEO) compensation as proxy for the compensation committee’s perception of audit quality, the study examines whether compensation committees perceive performance metric informativeness as being affected by auditor tenure.

Design/methodology/approach

The paper regresses CEO cash compensation on accounting-based performance metrics and on interactions between auditor tenure and accounting-based performance metrics while controlling for other factors previously shown to affect CEO pay. Auditor tenure is measured using continuous and dichotomous variables.

Findings

Auditor tenure is associated with a reduced (positive) weight on earnings (operating cash flows), which suggests lower perceived audit quality as tenure lengthens consistent with the auditor closeness argument. This relation is asymmetric, i.e. the negative effect of longer auditor tenure on incentive contracting is more pronounced for positive earnings. The results are robust to using CEO total compensation as the compensation measure, as well as using level and change specifications.

Research limitations/implications

The inability to control for audit partner tenure in assessing the effect of audit firm tenure on incentive contracting and the potential endogeneity between auditor tenure choice and incentive contracting are the main limitations of this study. Given the lack of information on US audit partner tenure, the study could not control for the audit partner tenure issue. However, the study has attempted to mitigate the endogeneity issue by using a Heckman selection model that includes in the first-stage a regression of auditor tenure on various firm, performance measure and CEO-related governance characteristics, based on existing models (Li et al., 2010).

Practical implications

Compensation committees view auditor tenure as an indicator of accounting quality in setting CEO pay. Further, long auditor tenure is perceived as detrimental to financial reporting integrity, particularly when earnings numbers suggest positive managerial performance and innovations.

Originality/value

This study provides empirical evidence that auditor tenure matters in setting executive pay. Further, this study shows evidence on the link between auditor tenure and audit quality from an internal user’s perspective. Prior studies have focused either on external users (investors, creditors) or on the preparer (using measures such as discretionary accruals or meet/beat analysts’ forecasts or forecast guidance).

Details

Review of Accounting and Finance, vol. 19 no. 3
Type: Research Article
ISSN: 1475-7702

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Article
Publication date: 19 September 2016

Daniel Kipkirong Tarus and Ezekiel Ayabei

The purpose of this study is to examine the effect of board composition on capital structure of a firm.

Abstract

Purpose

The purpose of this study is to examine the effect of board composition on capital structure of a firm.

Design/methodology/approach

The paper uses data from firms listed in Nairobi Securities Exchange covering the period 2004-2012. Fixed effect regression model was estimated to test the effect of board composition on capital structure and how chief executive officer (CEO) tenure moderates the relationship.

Findings

The paper finds that board composition has important implications on capital structure decisions. Specifically, director independence is positively related to leverage, whereas CEO duality and tenure have negative and significant effect on leverage. In addition, the interaction effect of CEO tenure indicates that when CEOs have long tenure, the power of independent directors to influence capital structure decisions diminishes. Further, the study found that under long CEO tenure, long-tenure boards use less leverage in their capital structure. As expected, dual CEO with long tenure uses less leverage.

Originality/value

The study uses data from an emerging market, contrary to previous studies using data from developed markets, to test the relationship between board composition and leverage. Second, the paper tests the moderating effect of CEO tenure on board composition – leverage relationship based on the idea that entrenched CEO may influence the decision-making ability of directors, particularly capital structure decisions.

Details

Management Research Review, vol. 39 no. 9
Type: Research Article
ISSN: 2040-8269

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Article
Publication date: 19 January 2010

John Byrd, Elizabeth S. Cooperman and Glenn A. Wolfe

The purpose of this paper is to examine how board tenure affects the compensation of CEOs using a sample of 93 publicly traded US banks.

Abstract

Purpose

The purpose of this paper is to examine how board tenure affects the compensation of CEOs using a sample of 93 publicly traded US banks.

Design/methodology/approach

The paper proposes a CEO allegiance hypothesis whereby long‐term relationships with executives and other directors will shift allegiance from shareholders to executives vs a more traditional expertise hypothesis that predicts superior monitoring of executives by directors with longer tenure. A generalized least squares regression methodology is used to examine the relationship between CEO compensation and outside director tenure.

Findings

For the full sample, board tenure variables were found to be insignificant. However, when examining a subsample of firms with CEO tenure of greater than six years or more, the relationship between CEO pay and the median tenure of outside directors becomes positive, supporting a CEO allegiance hypothesis.

Research limitations/implications

On a caveat, since this study relies on data for large bank holding companies over a short period of time, further research is needed to determine if the results carry over to a broader sample of firms and across time.

Practical implications

The results suggest that the independence of outside directors may be compromised when they serve for longer tenure periods together with the same CEO; an important consideration for better corporate governance.

Originality/value

The study provides a unique examination of outside director independence from the perspective of board tenure and the long‐term relationships with executives and other directors that may result in allegiance shifts away from shareholders and towards managers.

Details

Managerial Finance, vol. 36 no. 2
Type: Research Article
ISSN: 0307-4358

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Article
Publication date: 31 August 2010

Yudan Zheng

The paper aims to study the effect of tenure on the structure of CEO compensation. The relation between CEO compensation and CEO tenure provides a good testing bed for…

Abstract

Purpose

The paper aims to study the effect of tenure on the structure of CEO compensation. The relation between CEO compensation and CEO tenure provides a good testing bed for many effects: the managerial power effect, the portfolio consideration effect, the learning effect, and the career concern effect.

Design/methodology/approach

Tobit regressions were run of the percentage of equity‐based compensation on CEO tenure and the effect of tenure compared between inside CEOs and outside CEOs.

Findings

It was found that the percentage of equity‐based compensation increases during the early years of tenure for outside CEOs, and decreases during the later years of tenure for inside CEOs. Before they are tenured, outside CEOs have significantly higher and faster growing percentage of equity‐based compensation than inside CEOs. Furthermore, the portfolio consideration effect and the learning effect are the major effects in explaining the effect of tenure on the compensation structure.

Practical implications

The evidence that boards of directors take into account the CEOs’ holdings of equity incentives, the types of CEOs, and their years on tenure to adjust the structure of CEO compensation indicates that firms should, and do, try to optimize their CEO compensation structure on the basis of firm‐specific or CEO‐specific characteristics. It is suggested that there is no simple formulaic approach to governance reform.

Originality/value

The paper contributes to the literature by studying and explaining the different patterns of compensation structure over CEO tenure between inside CEOs and outside CEOs.

Details

Managerial Finance, vol. 36 no. 10
Type: Research Article
ISSN: 0307-4358

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Article
Publication date: 11 April 2021

Suherman Suherman, Berto Usman, Titis Fatarina Mahfirah and Renhard Vesta

This paper aims to investigate the relationship between female executives, chief executive officer (CEO) tenure and corporate cash holdings in the context of the…

Abstract

Purpose

This paper aims to investigate the relationship between female executives, chief executive officer (CEO) tenure and corporate cash holdings in the context of the developing Southeast Asian capital market (Indonesia).

Design/methodology/approach

The sample was screened from 231 publicly listed companies in the Indonesian Stock Exchange. The period of observation was 2011–2017. Two measures were applied for corporate cash holdings: the ratio of cash and cash equivalent to total assets and cash and cash equivalent to net assets. Three surrogate indicators were used for female executives: female CEO, the proportion of female members in the board of management and the number of female members in the board of management. CEO tenure is the length of time a CEO has been a member of the board of management. This study uses panel data regression analysis, including the fixed effect model with clustered standard errors.

Findings

The empirical evidence indicates that female executives and CEO tenure are positively and negatively associated with corporate cash holdings, respectively, and both are significantly related. Additional analysis using lagged independent variables remains consistent with the main analysis, suggesting that corporate cash holding becomes higher as a female presence in the board of management increases.

Research limitations/implications

Empirical tests set in Indonesia suggest that female executives are more conservative and risk-averse, thereby holding more cash with a precautionary motive. The findings also imply that CEOs with long tenure focus on long-term performance such as increasing research and development investments or capital expenditure, thus holding less cash. Accordingly, policymakers and regulators should promote diversity issues proportionally and advance to the board level.

Originality/value

This study contributes to the field of executive and CEO studies by enriching the empirical findings in related topics. In addition, to the best of the authors’ knowledge, this is one of the first studies applying two measures of cash holdings in the setting of a developing Southeast Asian capital market (Indonesia).

Details

Corporate Governance: The International Journal of Business in Society, vol. 21 no. 5
Type: Research Article
ISSN: 1472-0701

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Article
Publication date: 29 January 2018

Mahdi Salehi, Mahmoud Lari Dasht Bayaz and Mohamadreza Naemi

The purpose of this paper is to examine whether the characteristics of a CEO, that is, tenure and financial expertise, could affect the timeliness of an audit report.

Abstract

Purpose

The purpose of this paper is to examine whether the characteristics of a CEO, that is, tenure and financial expertise, could affect the timeliness of an audit report.

Design/methodology/approach

Research data gathered from listed companies on the Tehran Stock Exchange during the four-year period 2013-2016.

Findings

The results obtained from model fittings indicated that there is only a negative and significant relationship between CEO financial expertise and natural logarithm of audit report lag and no significant relationship observed between the former and two other indices of timely audit report. Moreover, no significant relationship was found between the CEO tenure and other three indices of timely audit report.

Originality/value

This paper is the first study, which developed the literature of timely audit report using CEO tenure effect and financial expertise tests for timely audit reports in Iran.

Details

Management Decision, vol. 56 no. 2
Type: Research Article
ISSN: 0025-1747

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Article
Publication date: 18 October 2019

Mengge Li and Jinxin Yang

As the primary decision makers, chief executive officers (CEOs) play pivotal roles in firm innovation. However, little is known regarding how CEOs influence the…

Abstract

Purpose

As the primary decision makers, chief executive officers (CEOs) play pivotal roles in firm innovation. However, little is known regarding how CEOs influence the exploitation and exploration paradox. To advance theory and research, the purpose of this paper is to investigate the joint effects of CEO tenure and CEO–chair duality on a firm’s shifting emphasis between exploitative and exploratory innovation.

Design/methodology/approach

This paper takes the approach of a longitudinal sample of 81 US pharmaceutical firms.

Findings

As CEOstenure advance, their firms’ percentage of exploitative innovation increases. Furthermore, non-duality (separation of board chair and CEO) further strengthens the positive relationship between CEO tenure and the percentage of exploitative innovation.

Research limitations/implications

This study integrates upper echelons theory and behavioral agency theory to juxtapose the effects of CEOs on technological innovation. This study extends knowledge of strategic leadership and innovation by showing that CEOs influence the balance between exploitative and exploratory innovation. Furthermore, this study also contributes to the corporate governance literature by demonstrating that monitoring vigilance could inhibit capable CEOs from pursuing more exploratory innovation.

Practical implications

Boards of directors should allow CEOs to have greater discretion over innovation, and vigilant monitoring and control may force CEOs to focus less on exploration.

Originality/value

This is one of the few studies that explicitly investigate how CEO influences a firm’s emphasis on exploitative innovation and exploratory innovation.

Details

Journal of Strategy and Management, vol. 12 no. 4
Type: Research Article
ISSN: 1755-425X

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Article
Publication date: 31 July 2009

Shane van Dalsem

The purpose of this paper is to investigate the effect of executive severance contract maturity policies on the likelihood of forced turnover and the length of tenure for…

Abstract

Purpose

The purpose of this paper is to investigate the effect of executive severance contract maturity policies on the likelihood of forced turnover and the length of tenure for CEOs who are forced from their positions.

Design/methodology/approach

The paper utilizes logistic and accelerated failure time models to test the hypothesis that severance contracts decrease information asymmetries resulting in an increased likelihood of forced turnover and a shortened tenure for those CEOs who are forced out.

Findings

The results provide evidence that fixed‐term severance contracts increase the likelihood of forced tenure and decrease the length of tenure for CEOs who experience a forced turnover during the period, while time‐independent contracts do not.

Research limitations/implications

The limitation is the possibility that an omitted variable jointly determines the likelihood of the presence of a severance contract and the effect on forced turnover. Future research should investigate other possibilities beyond the CEO coming from outside of the firm.

Practical implications

The findings confirm that the maturity policies of severance contracts affect forced turnover. The results suggest that there may be a benefit in designing severance contracts to expire to encourage more efficient turnover of underperforming CEOs.

Originality/value

This paper contributes to the empirical corporate finance and accounting literature by differentiating between forced and unforced turnover when analyzing the effects of severance contracts and demonstrating that the time dimension of severance contracts may provide the desired result of encouraging the identification of CEO‐firm mismatches.

Details

Managerial Finance, vol. 35 no. 9
Type: Research Article
ISSN: 0307-4358

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Book part
Publication date: 19 March 2018

Naseem Ahamed and Nitya Nand Tripathi

Change of leadership is a big and important incident in the life of a company. As important as it is for the company, it is equally a difficult decision to make for the…

Abstract

Change of leadership is a big and important incident in the life of a company. As important as it is for the company, it is equally a difficult decision to make for the board of directors. Most of the big companies have a committee dedicated toward laying out a succession plan of the existing chief executive officer (CEO). The big dilemma, however, is whether to appoint someone from within the company and let him or her lead as he or she has been associated with the company and knows the internal dynamics better or to induct some outsider and take advantage of his or her expertise/reputation in the market. The balance appears lopsided when the result of this chapter is perused. Companies on an average seem to reap more benefits if an existing executive is promoted to the office of CEO rather than hiring an outsider. The benefits which are talked here from promoting insiders are indirect ones and do not have a direct bearing with the finances of the company. As shown by the results that insiders are more likely to continue with the company for a longer duration as the CEO as well as not as the CEO which defers the hiring and firing costs (screening candidates, conducting interviews, huge severance packages, golden parachutes, etc., are the costs referred to) for a longer period. Other benefits arising from insider CEOs are upfront awareness about the company’s work culture, production/service capacity, efficiency, strategies followed till date, etc., which gives him or her a head start compared to an outsider.

Details

Global Tensions in Financial Markets
Type: Book
ISBN: 978-1-78714-839-0

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Article
Publication date: 11 April 2016

Katharina Laufs, Michael Bembom and Christian Schwens

Using arguments from the upper echelons perspective this paper aims to examine the impact of CEO characteristics on small and medium-sized enterprises’ (SMEs’) equity…

Abstract

Purpose

Using arguments from the upper echelons perspective this paper aims to examine the impact of CEO characteristics on small and medium-sized enterprises’ (SMEs’) equity foreign market entry mode choice and how these associations are jointly moderated by geographic experience of the firm and host-country political risk.

Design/methodology/approach

The empirical analysis draws on data gathered from German SMEs testing triple-interaction effects between CEO’s age, firm tenure and international experience, geographic experience of the firm (organizational level), and host-country political risk (environmental level).

Findings

Empirical findings validate that the influence of CEO’s age and firm tenure on SME foreign market entry mode choice varies by managers’ level of managerial discretion (i.e. latitude of action) as determined by the SME’s geographic experience and the level of political risks prevailing in the foreign market.

Practical implications

Empirical findings help SME owners and managers to understand how CEO’s age and firm tenure are related with individual’s risk-taking behavior and information-processing demands and how these contingencies vary by the context in which the individual CEO is nested.

Originality/value

This study contributes to the growing body of literature focussing on SME foreign market entry mode choice by emphasizing the important role of CEOs in the decision to internationalize. More specific, this study contributes by an examination of the interactive effect of CEO’s age, firm tenure and international experience, geographic experience of the firm and host-country political risk and, therefore, emphasizes the context and boundary conditions under which the association between CEO characteristics and foreign market entry mode choice is more or less pronounced.

Details

International Marketing Review, vol. 33 no. 2
Type: Research Article
ISSN: 0265-1335

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