AsianFA_Management Connectedness and Corporate Investment

MAN PHAM    Man Duy Pham, Jing Yu, Mahmoud Agha
27 May 2018
Category: Corporate Finance

Country or region: American Samoa

This item is working paper that has been accepted for presentation at Asian Finance Association Annual Meeting in Tokyo, Japan 2018. It is an empirical work that links one of emerging facet of corporate governance research to corporate investment decisions.

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Distinct from prior literature that focuses on board quality and CEO characteristics, this study examines how the connectedness between subordinate executives and their CEO affects corporate investment decisions, where a senior manager is assumed loyal to the CEO if he is appointed during the current CEO’s tenure. On a sample of S&P1500 companies from 2000 to 2015, we observe a robust decline in corporate investment rate in firms with strong managerial connectedness. Such a decline proves to be a detriment to firm investment efficiency when reducing the sensitivity of investment needs to firm growth opportunities. To corroborate our agency explanation, we further provide evidence of a rise in executive compensation in firms with low investment level but strong TMT connectedness. The adverse effects of management connectedness on corporate investment are only moderated by financial analyst coverage but not by any other well-known governance mechanisms. This study reckons the checks and balances of executive suites as a distinguished aspect in corporate governance system for corporate investment behaviour and firm valuation.

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