Does CEO duality affect company Performance final 2

7/30/2015

CEO Duality and Corporate Performance

Agency or Stewardship?

Byron MainUniversity of saint thomas

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Table of ContentsIntroduction 2

Agency Theory 2-5

Form 3

Advantages 3-4

Hypothesis 1 4

Disadvantages 4-5

Stewardship Theory 5

Form 5

Advantages 5-6

Hypothesis 2 6

Disadvantages 6

Factors 6

Informal CEO Power 6-7

Hypothesis 3 7

Firm Performance 7-8

Hypothesis 4 8

Competition 8

Hypothesis 5 8

Additional Factors 8

Hypothesis 9

1-5 9

Final Hypothesis 9

Measuring Firm Performance 9-10

Formula (Elsayed) 10

Formula (Yang) 10

Research Design and Results 10-26

Elsayed design 10-14

Finkelstein design 14-19

Yang design 19-26

Conclusion 26-27

Footnotes 28-29

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Introduction:

With the rise of global interconnectivity, and multinational corporations that span whole

continents, engaging with consumers the world over, “the impact of board leadership structure…on

corporate performance “1 has come into the spotlight. The main focus is on the concept of the duality

CEO (i.e. one who holds both the Chief Executive Officer and Chairman of the Board). Two main notions

on the view of CEO duality are Agency and stewardship theories, which will be further explained below.

The following paper will show how a number of factors including company financials, industry, areas of

business, company size etc. are affected by CEO duality and with performance indexes providing sound

evidence will conclude that both the agency and stewardship theories are valid given certain situations

(contingency theory). Thus firm performance is influenced very little by CEO duality and more so by

cornucopia of components though four key factors such as market environment (competition), industrial

activity, firm performance, informal CEO power (influence within the company) are the most influential

of all the determinants.

Agency Theory:

To begin, is the concept of agency theory what some refer to as vigilant corporate governance.

In the eyes of many a comprehensive and overarching management in the modern era of MNC’s (Multi-

National Corporations) is an absolute necessity to prevent as Jensen and Meckling stated in their 1976

essay a single agent (some refer to as duality CEO) from seeking “to maximize his wealth at the expense

of the shareholders’ value”2. A continuation of this belief was presented by Mallin in 2001 who

expressed that “without good corporate governance both corporate performance and the investors’

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money may be at risk”3. To that end agency theory put simply “Bearle and Means (1932) is the

separation of ownership from management “4. Essentially in corporate governance it boils down to “a

contract under which one or more principals engage another person (the agent to perform some service

on their behalf which involves delegating some decision making authority to the agent” 5. As previously

stated, an agent unrestricted will attempt to maximize own personal happiness, therefore the principle

from the preceding example must ensure some sort of oversight over company decisions.

Form:

The most common form of agency theory in modern corporations is the separation of the CEO

(chief executive officer) and the COB (chairman of the board). Of course with each corporation

responsibilities between the COB and CEO will vary. However in most cases the chairman of the board

runs the board of directors, deals with external funding, sets forth compensation plans, CEO succession

and strategic plan guidance. Meanwhile the Chief Executive Officer handles “strategic process,

operating process, organizational process” 6. Moving forward “Agency theorists have identified boards of

directors as a primary monitoring device protecting shareholder interests” 7. Effective (vigilant) boards

tend to be composed of “a large group of independent, outside directors...individuals not otherwise

associated with the corporation” 8; and tend to own a large percentage of the held stock. One example is

Warren Buffett (CEO of Berkshire Hathaway), who has either himself or a proxy on nearly every single

one of the companies to which he owns more than 5% of the outstanding stock (i.e. Duracell, Coca Cola).

Advantages:

Outside board members are more effective than those promoted from within the company for

three reasons: Firstly the focus in purely on financial, and long term viability of the company. Second; if

performance is low they are more likely to call for a change in strategy/ managers for the firm. Thirdly,

they are not beholden to the CEO, for their promotion and thus have the freedom to act without the

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worries of retributive action. There are a growing number of reasons why many scholars and business

professionals feel that agency theory (non-duality CEO) is in fact the only viable form of corporate

management structure. Firstly one of the main factors as stated above is that most firms today operate

on a global scale and require, an agent to carry out tasks, so some sort of oversight of the agent on

behalf of the principle is necessary. A second important factor has been the “growing number of

financial and accounting scandals that have occurred in several modern corporations”9 (e.g. WorldCom,

Enron, Wachovia). In the case of Enron it was a systematic failure of the board to watch over Kenneth

Lay who was a Duality CEO and appointed most of the board members from within the ranks of the

company itself. Another reason for the rise of agency theory is government regulations set out by “U.S.

securities and exchange commission (SEC) and the Dodd-Frank Act require listed firms effective 2010 to

disclose reasoning behind the board leadership structures” 10.

Hypothesis (1): In less competitive market environments, larger firms tend to embrace agency

theory and stringent monitoring to compensate for lower levels of agent discipline from market

competition.

Disadvantages:

With the above being stated there remain several issues with the implementation and use of

agency theory. The primary problem is that of agency costs, which are defined as those costs borne by

shareholders to encourage managers (agents) to maximize the wealth of shareholders over their own

self-interest. There are three types of agency costs: “1) expenditures to monitor managerial activities,

such as audit costs; 2) expenditures to structure the organization in a way that will limit undesirable

managerial behavior…3) opportunity costs which are incurred when shareholder-imposed restrictions,

such as requirements for shareholder votes on specific issues limit the ability of managers to take

actions that advance shareholder wealth” 11. These costs are always passed unto the shareholder and

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therefore represent a necessary but unfortunate cost. Two other costs that are also heightened with

agency theory is that of information specificity costs (specific information that gives firms a higher

market power) and information immediacy costs (costs for loss opportunities resulting from information

becoming obsolete). Each of the above costs is higher when a management structure follows agency

theory for there is an extra chain of command and separation of responsibilities, slowing down response

time to new information and situations. Lastly in agency theory is the issue of monitoring the board and

COB themselves (who watches the watcher).

Stewardship Theory:

Stewardship theory, is the other side of the coin from agency theory. Within corporate

governance stewardship theory unlike agency assumes that the agent will in fact align their actions in

line with the wishes of a principle. Agents are seen as essentially loyal to a company and will do anything

to achieve a high company performance.

Form:

Agents who participate in stewardship theory are most often referred to as duality CEO’s, for

they fulfill both the position of CEO (chief executive officer) and COB (chairman of the board) the

common responsibilities of each was outlined in the paragraph above.

Advantages:

Continuing on, there are several key advantages to having one person fulfill both of the

aforementioned positions. Firstly CEO duality “establishes a strong and unambiguous leadership” 12,

which would allow for an uninterrupted chain of command and unambiguous authority over all aspects

of a situation. Also may CEOs “may often have the best specific knowledge of the strategic challenges

and opportunities facing the firm” 13. In addition the “strong CEO leadership can help firms adapt to

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environmental demands” 14. This last point would be exemplified by the “exogenous shock…

implementation of the 1989 Canada-United States Free Trade Agreement (FTA) which increased the

competition of U.S. firms by eliminating all tariffs and other trade barriers between the U.S. and

Canada”15. Through various studies across all industries it was found that on average duality firms

outperformed firms following agency theory by a margin of three percent after the (FTA) went into

effect 16 Also having one manager in charge is that it confers upon the shareholders of the company and

the public at large a sense “legitimacy, sending a signal…that a firm has a clear sense of direction”17. This

signal of continuity can “create an illusion of stability and a sense that a dominate leader, not the

environment, is determining organizational destiny” 18. Also, having one agent in charge lessons the

agencies costs that would be incurred upon an organization with a non-duality structure.

Hypothesis (2): Firms with duality CEO’s innovate and adapt more quickly to new information, at

less cost than firms possessing separate CEO and chairman of the board.

Disadvantages:

However stewardship theory and the duality CEO are not without issues. As stated in the above

paragraph an agent acting as a duality CEO may put personal gain over company performance. Also

having a duality CEO increases the risk of entrenchment which may as stated before “lead to

opportunistic and inefficient behavior that reduces shareholder wealth” 19. Finally, having only one agent

in control can lead to static behavior by a corporation, whereupon only one set of ideas is pursued even

if they may not be in the corporations’ principal interest

Factors:

Informal CEO Power: is derived from sources of influence not directly tied into the

responsibilities relating to the CEO’s official position. CEO’s tend to garner their informal power through

key sources for instance “developing prestigious contacts with other organizations…managing critical

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organizational problems…engendering loyalty within their organizations…and co-opting boards of

directors”20. High amount of informal power can be tantamount to CEO duality, as well as be a cause for

entrenchment within the firm. Given the previous statement vigilant boards tend to be very wary of

CEO’s with high amounts of informal power, and thus reducing their own influence over the firm,

therefore many boards would choose an independent board chairperson to counteract the high

informal power retained by the CEO.

Hypothesis (3): CEO duality will tend to be lower when a CEO possesses high informal power,

with the existence of an independent vigilant board.

Firm Performance: Both Finkelstein and Khaled Elsayed see firm performance as a key indicator

whether a firm chooses duality CEO or not. Overall firm profitability is an indication of whether the

CEO’s strategic policies are effective. According to Finkelstein “when firm performance is good, strong

boards may seek to avoid” 21 a duality CEO for this runs the risk of entrenchment. A few reasons for this

are as follows. Firstly high performance tends to enhance the status and informal power of the CEO.

Next it creates organizational slack which CEO’s may use to benefit themselves or those beneath to

engender personal loyalty. Thirdly “because attributions of CEO effectiveness are often made when

firms are successful…there is less need to create a sense of managerial efficacy through duality…

stakeholders may already perceive firms operations as legitimate” 22. Lastly boards whose firms are high

performing are less likely to fire the CEO, whom many perceive to be responsible for the good fortunes

of the firm. However CEO duality can be valued by vigilant boards when overall performance is low, so

as to have one overall voice in command so that the implementation of a turnaround strategy occurs

unimpeded. There are many ways of measuring firm performance some of them will be mentioned in

the subsequent sections. At this moment Finkelstein’s definition must suffice with firm performance

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being “measured by return on assets (ROA), a common indicator of short-term performance, calculated

as net income divided by total assets”23.

Hypothesis (4): Strong performance by a firm with a vigilant independent board will result in

lower levels of CEO duality.

Competition (Yang): Competition, more specifically how well a company within an industry fares

in various levels of competition. The situation being utilized was mentioned in the above paragraph on

stewardship theory as the passing Canada-United States Free Trade Agreement of 1989 which removed

all barriers between the two nations. This agreement instituted the world’s largest “bilateral trade

between Canada and the U.S.”24. The new Canadian imports tended to compete directly with products

provided by U.S. based firm, the FTA become “associated with substantial employment loss, labor

productivity gains, and reduction in price-cost margin” 25. The preceding statement suggests that the FTA

brought increased competition to U.S. firms therefore is a perfect measure for how CEO duality will

effect firm performance in differing levels of market competition.

Hypothesis (5): Firms following stewardship theory will be more common and outperform firms

following agency theory, whenever there is a significant increase in competition, in the market

environment.

Additional Factors: The following factors will either be controlled for or utilized in the formulas

that the research experiments below are based on.

Firm Size- how large a firm is in relation to its sales. “Measured as the natural logarithm of net sales…total assets and number of employees are two alternative measures” 26 that may be utilized if net sales is not available.

Non-Production overhead- “This variable is measured as the ratio of general, selling, and administrative expenses to sales” 27.

CEO shareholdings: is the proportion of a firm’s total shares owned by the CEO. Industry segments: utilized when trying to examine just one particular industry segment

across multiple companies with every firm having multiple industry segments. Therefore dummy variables are created for industry segments that are not part of the analysis.

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CEO duality- give variables to firms on the basis of either following agency or stewardship theory. For agency value=0, stewardship value=1

Board size- number of directors sitting on the board Institutional ownership- refers to the ownership stake in a firm that is being retained by

financial organizations, endowments, or pension funds (CalPERS). Organizations such as these routinely purchase great quantities of a firms outstanding shares and thereby wield considerable influence on management.

Debt ratio (Elsayed) - can be shown as the ratio of total debt to total assets. Capital Intensity (Elsayed) – is the ratio of net fixed assets to total assets.

Revised Hypothesis:

1) In less competitive market environments, larger firms tend to embrace agency theory and stringent monitoring to compensate for lower levels of agent discipline from market competition. Yang 15

2) Firms with duality CEO’s innovate and adapt more quickly to new information, at less cost than firms possessing separate CEO and chairman of the board.

3) CEO duality will tend to be lower when a CEO possess high informal power, with the existence of an independent vigilant board.

4) Strong performance by a firm with a vigilant independent board will result in lower levels of CEO duality.

5) Firms following stewardship theory will be more common and outperform firms following agency theory, whenever there is a significant increase in competition, in the market environment.

Final Hypothesis (overall): There is not one optimal leadership structure (i.e. agency or stewardship theory), as both have costs and benefits that will succeed under the right conditions of competition levels (duality better at higher levels), industrial activity, current financial performance, informal power of CEO. However overall companies with duality CEO’s do tend to perform better than those with separated leadership.

Measuring Firm Performance:

One of the main issues with measuring the effectiveness of CEO duality (stewardship theory), in

fact there are two prevailing ways of measuring firm performance. One is accounting based as

championed by Muth and Donaldson in 1998, while the second and more widely accepted is the use of

market valuation measures especially that of Tobin’s q ratio, which was first introduced by Barnhart and

Rosenstein in 1998 29. Tobins q, readily defined as the “ratio of a firm market value to the replacement

cost of its assets” 30. Additionally, many have argued that it is far more appropriate because it “is a long

term measure that takes risks and return dimensions into account and reflects the firm’s ability to

improve performance over time”31.

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Formula (Elsayed):

Tobin q values:

Equilibrium: q= 1 Higher than expected investment opportunities: q>1 Less profitable than expected investment opportunities: q<1

Tobin q formula as used by Elsayed and formulated by Chung and Pruitt:

Tobin’s q ratio= [MV +BV of preference capital +BV of long term debt + BV of Inventory + BV of Current Liabilities – BV of Current Assets]/ [TA].

o MV= market valueo BV= book value

The second formula for measuring Tobin’s q that will be used as a measurement of firm performance

with an increase in competition is Tina Yang’s seminal formula.

Formula (Yang):

Tobins Q= y1tariffi*post89*duali + y2tariffi*post89 +tXit + dt + di + ∑it

i= index firms dt= denotes time, t= 1979-1998 di= denotes firm fixed effects tariffi= avg. U.S. tariff rate on Canadian imports for firm i between 1986-1989. Post89= 1 if t>1989 otherwise=0 Duali= 1 if firm has a stable board leadership structure of CEO being the COB (Duality CEO), zero

otherwise X= firm characteristics i.e. firm size, ROA, capital structure, and risk TA= total assets

Research Designs and Results:

In the following section a series of research designs will be used to prove the hypothesis

discussed in an aforementioned paragraph.

Khaled Elsayed:

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The first measuring corporate performance, comes from Khaled Elsayeds’ paper Does CEO

Duality Really Affect Corporate Performance. In this essay to determine whether CEO duality had any

impact on performance Elsayed used a sample of firms from the “Egyptian Capital Market Agency over

the time period 2000 to 2004”32. In this study using the above mentioned Chung/ Pruitt formula for

Tobin’s q along with board leadership structure as independent variable (1=CEO duality, 0=otherwise),

corporate performance as the dependent variable. In addition several key factors are considered and

controlled for including ‘corporate size, debt ratio, capital intensity’ all discussed in a previous

paragraph. Table 1 below has descriptive statistics for all variables used or controlled for in Elsayed’s

experiment.

Given the above statistics Elsayed attempts to estimate the impact CEO duality may have on overall firm

performance. To test this main hypothesis a Least Absolute Value model must be utilized in place of a

traditional ordinary of least squares on both ROA, and Tobin’s q due to the fact that (OLS) is far to

affected by extreme outliers in observation, a flaw that the Least Absolute Value (LAV) model does not

share. In the LAV model the median of dependent variable (firm performance) can be estimated

through “the raw sum of absolute deviations around the unconditional median to find the regression

coefficient that minimize regression functions” 33. In other words the LAV model selects parameters that

mitigate any absolute residuals. Table 3 below will show the LAV regression with CEO duality as

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independent variable and firm performance shown by proxy with ROA and Tobin’s q ratio substituted in

its place as the dependent variables.

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From the LAV regression above it is clear that CEO Duality has almost no impact on firm performance as

demonstrated by ROA and Tobins q with values of 0.9483 and 0.0154 That is significantly contrasted to

institutional ownership whose values are 0.0467 and 0.008 which both fall within the desired range of

values (i.e. p<0.10, p<0.010, p<0.001. However this LAV regression did encompass multiple industries

which could throw off many of the values, especially if some had positive values while others did not.

Saying that Table 4 breaks everything down by industry. In the following table it is seen that while 5

industries had generally positive coefficients for Tobins q and thus firm performance there were several

that either had negative (cement) or insignificant (steel, constructions, communication etc.) coefficients.

Table 4 may imply that CEO duality is indeed positively correlated with certain industries and negative

with others. However there are far too many other possibilities for these trends to say that CEO duality

alone was the cause for overall firm performance. Other possibilities may include that most boards with

high performing firms would not wish CEO duality to occur as explained earlier in the paper. With this

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belief in mind all industries are separated into coefficient values (i.e. positive, negative, or insignificant.

This separation is shown in Table 5 below.

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As can be seen from Table 5 above CEO duality has a greater impact on low performing sub-group ROA=

1.512) relative to the high group (ROA=0.982). This would give credence to hypothesis 4: Strong

performance by a firm with a vigilant independent board will result in lower levels of CEO duality.

Finkelstein and D’vani:

The second experiment was designed by Sydney Finkelstein and Richard A. D’Aveni unlike the

preceding Elsayed did not focus on a sample of large firms across industries (i.e. ECMA). Instead

choosing to focus single industry studies for a few key advantages. Firstly, for the “differences affecting

how variable interact with environmental contingencies are controlled for with greater accuracy” finkelstein

1089. In addition within single industry studies intrainindustry heterogeneity can is more easily realized.

Lastly single industry studies represent the perfect platform to test new ideas due to the high validity of

information garnered from research. To the actual experiment itself, Finkelstein and D’Aveni ran it much

like Elsayed did above with the exception already stated of only examining on an industry, not a market

wide level. To this end, the printing and publishing, computers, chemical industries were each analyzed

separately, to test the validity of their hypothesis about CEO duality since each industry “face different

critical success factors and have somewhat different propensities to CEO duality” Finkelstein 1090. Now onto

the actual form of the study group itself which as stated previously consisted of all firms (public) whose

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primary market segment was chemicals, printing and publishing, or computers “according to Ward’s

Directory from 1984 through 1986” 34. That being said firms were not present on in the study if one or all

of the following requirements went held true. First “They were subsidiaries of other firms, (2) they had

more than 50 percent of their sales in businesses outside of their primary business… (3) data were not

available” 34. In the end a total of 41 firms (printing and publishing), 35 firms (chemical), and 32 firms

(computers) were analyzed over a three year period with 107, 102, and 91 observations for each of the

industries respectively. This study used a set of seven factors to measure how common CEO duality was

within each industry the results of which are in the tables below, with CEO duality as the dependent

variable.

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Table 1 above shows all the descriptive statistics for variables in the printing and publishing

industry, while table 2 below has descriptive statistics for the combined chemical and computer industry

segments.

Now granted without logistic regression analysis, results from the two above tables cannot be fully

formed. However two minor observations can be taken with a cautionary mind. Firstly, observations of

CEO duality among the three market segments was significantly lower than the fortune 500 (years 1984-

1986 of 82percent. Whereas CEO duality was 56 percent for the printing and publishing segments; 62

percent for the combined chemical and computer industries. Secondly “correlations between board

vigilance and CEO duality were positive for both groups of firms” 34. Regardless of the previous

statement nothing can be certain until regression analysis both on the printing and publishing, as well as

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the combined computer, chemical segment is performed the results of which can be found below on

pages 17-18.

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As previously noted the man goal of this study was the relationship between boards of director and CEO

duality. Therefore the results from the above tables show the coefficient values of factors relate back to

CEO Duality. Take for example Model 5 on tables 3 and 4, under the informal CEO power and ROA tabs.

In both cases the numbers (coefficient) is positive (Model 5 Table 3 ROA= 0.082, CEOIP=0.180), meaning

that the higher return on assets as well as high informal power by the CEO would result in firms less

likely following agency theory. Firm would be more likely to follow if the interaction terms were

negative. Essentially depending on the sign of the interaction terms in relation to the vigilant board,

duality may be more or less likely to occur. Additionally, several other important facts came to light. The

first being in a model where interaction terms (informal CEO power, ROA etc.) board vigilance and CEO

duality had positive correlations. “When other influences held constant…vigilant boards are more

concerned with unity of command than with entrenchment avoidance”35. Secondly, when CEO informal

power is very high vigilant boards shift their focus away from unity of command and begin practicing

agency theory to avoid entrenchment.

Tim Yang, Shan Zhao:

The last study that will be utilized comes from the aforementioned Tim Yang, and Shan Zhao in

their essay CEO Duality, Competition, and Firm Performance. Their essay centers on the core belief that

after the application of an exogenous shock (i.e. unexpected event), firms following stewardship theory

(duality CEOs) tend to perform better than those with separated leadership. The study focused on U.S.

firms who were directly affected by the Canada-United States Free Trade Agreement of 1989 (the

exogenous shock). As previously stated the FTA increased competition for U.S. firms by significantly

lowering or eliminating all trade barriers with Canada. Like Elsayed, Yang and Zhao utilize Tobin’s q.

However their purpose is to create a “baseline model to estimate the impact of board leadership

structure on firm value” 36 given an exogenous shock. The formula above mentioned is as follows:

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Formula (Yang):

Tobins Q= y1tariffi*post89*duali + y2tariffi*post89 +tXit + dt + di + ∑it

i= index firms dt= denotes time, t= 1979-1998 di= denotes firm fixed effects tariffi= avg. U.S. tariff rate on Canadian imports for firm i between 1986-1989. Post89= 1 if t>1989 otherwise=0 Duali= 1 if firm has a stable board leadership structure of CEO being the COB (Duality CEO), zero

otherwise X= firm characteristics i.e. firm size, ROA, capital structure, and risk TA= total assets

Yang’s formula allows the use an exogenous shock such as the FTA of 1989, to study the effect of

endogenous choice (i.e. board leadership structure) will have on overall firm performance as

competition increases. This is done by comparing performances of duality and non-duality firms affected

by the liberalization of trade restrictions courtesy of the FTA, to the performances of duality and non-

duality firms that are not affected by Free Trade Agreement of 1989. This action will mitigate the

unwanted information courtesy of unobserved heterogeneities between stewardship (duality) and

agency (non-duality) firms. Next a few restrictions (controls) that will mitigate the issue of endogenously

turnover of all firms are as follows. Firstly only firms with stable leadership (board) that existed pre FTA

of 1989 will be considered. A board is considered stable “if it does not change leadership (dual) for more

than 80% of firm years for a minimum of four years from 1988 to 1998 37. Additionally for firms with 5-9

years of board data, leadership can only be different in one of the sample years, and for 10 years the

board leadership status can only be different in two years. Also a firm “cannot be a utility or a financial

institution, has positive values of total assets and net sales, has daily stock returns for at least one

quarter of the fiscal year…and has Compustat data before 1989. After meeting all these requirements

the final sample contained 1,927 (1,181 dual leadership, 746 separate leadership) firms observed during

the 1979 to 1998 time period for a total of 27,345 between the two categories. Following the previous

statement, is a return to Tobin’s q which is the primary measure of firm performance, for it states the

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net effect of changes in all of a firm’s aspects. Additionally the impact of ROA (return on assets), ROE

(return on equity), as well as market share on duality are reported. However like Elsayed controls are

put in place for all other descriptive characteristics that may affect Tobin’s Q. These being firm size,

current-year ROA, growth opportunities, capital structure and many others which are laid out below in

Table 1.

Variable Name Variable Description [computation presented using WRDS variable names]Tariff Average US tariff rate on Canadian imports for a firm from 1986 to 1988. Operationally, we first obtain the

average tariff rate for each U.S. industry on Canadian imports at the 4-digit SIC level for 1986-1988. We then compute firm-level tariff rates, by multiplying the industry-level tariff rate with the percent of the firm’s segment sales over the firm's total sales and then summing those products. We obtain the data on segment sales from Compustat Segment provided by the Wharton Research Data Services (WRDS).

Dual

Firm operating characteristics

Dummy variable that equals one, if the firm has a stable duality status for 1988-1998; or zero, if the firm has a stable non-duality status for 1988-1998.We define a firm as having a stable duality (non-duality) status, if the firm has a CEO (a director other than the CEO) as the Chairman of the Board (COB) for more than 80% firm years for a minimum of four years from 1988 to 1998.

Tobin's Q Market value of common equity minus book value of common equity plus book value of total assets, over book value of total assets [(prcc_f*csho-ceq+at)/at]

Firm size Natural logarithm of total book assets [ln(at)]

Return on assets (ROA) Earnings before interest, taxes and depreciation (EBIT) over book value of total assets [(oiadp+dp (if not missing))/at]

Return on equity (ROE) EBIT over common equity [(oiadp+dp(if not missing))/ceq]

R&D ratio R&D expenditure over sales [xrd/sale]; xrd=0, if missing.

Debt ratio Long-term debt over total assets [dltt/at]

Volatility Standard deviation of daily stock returns*the square root of 252We compute stock return volatility if the stock was traded for at least a quarter of the year.

Ratio of intangible assets Intangible assets over total book assets[intan/at]; if negative, then zero (one such observation)

Ratio of advertising expense Advertising expense over sales[xad/sale]

Ln(#business segments) Natural logarithm of the number of business segments, in which the firm operatesAltman z-score Altman (1968) z-score, as modified by MacKie-Mason (1990)

[(3.3(oiadp+dp (if not missing))+sale+1.4*re+1.2*(act-lct)))/at]Change in market share Sales growth minus the industry-year average (Frésard (2010))zCash The cash-to-assets ratio minus industry-year mean, over the industry-year standard deviation (Fresard

(2010)). Sales per employees Sales over total number of employees

[sale/(emp*1000)]Overhead expense Selling, General and Administrative Expense over sales

[xsga/sale]

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Input costs Costs of goods sold over sales [1-cogs/sale]

Wage Employee wage[(xlr*1000)/emp]

%DualBoard size%Outsider%D&O %Institution own

Percent of firms with stable duality statusTotal number of directors on the boardPercent of non-executive directors on the boardPercent of director and officer ownership

Percent of institutional ownership

Moving forward Table 2 panels A shows “key characteristics for 1,927 unique firms from 1979 to 1998,

partitioned by whether a firm is protected by U.S. tariff on Canadian imports (Tariff>0) prior to 1989.

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Variables are as described in Table 1. R&D is winsorized at 99%. ROE and sales growth are winsorized at

1% at both tails” 43.

From Panel A above, it is clear that firms whose products are protected by tariffs tend to be larger, and

more diversified than their unprotected brethren. Protected firms also tend to have higher ROA(A) 8%

before 1989, than unprotected firms(B) 7.32% That being said unprotected firms have higher Tobin’s q

mean: A=1.70 compared to B=1.61. Additionally these unprotected firms usually have higher sales

growth and more volatility in the stock mean B= 48.46%, mean A=46.27%. Most likely based upon

company performance as well as investor confidence. However for firm A when tariff is taken away ROA

decreases to 6.12%, while stock volatility increases to 55.75%.

One the other hand “Panel B reports summary statistics of key governance variables for 1988-1998, the

time period for which governance data are available. Test statistics for differences in mean (Mean dif)

are based on two-sample t-test. Test statistics for differences in median (Median dif)” 39.

The above image shows a positive correlation between tariff protection and board size, also there tends

to be a higher percentage of outsiders on boards of firms that have tariff protection 66.64% compared

to 61.40% for firms not under tariff protection. Lastly fewer boards under tariff protection have duality

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CEO’s with only 61.78% compared with firms not under protective tariff where duality CEO’s make up

63.122% of all leadership structures, a 1.44% observable difference. Finally the main results, the impact

of duality on Tobin’s q. Firstly Tobin’s q is reported and utilized as a median value to minimize the effect

brought on by extreme outliers. According to Tina Yang “for the entire sample of 27, 345 firm-year

observations the mean value of Q is 1.73 and median is 1.31 with a standard deviation of 1.65”. Table

three below reports regression estimation of the impact of board leadership on overall firm

performance, with all models taking into account control for firm-level clusters.

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Table 3, as mentioned in the preceding statement deals with duality’s impact on firm performance,

using Tobin Q as a measure. Column (1) is a baseline and the coefficient of variable interest

tariff*post89*dual is highly positive, which gives evidence that duality performs better as competition

increases. Columns (3) and (4) are the actual validity test. In (3) tariff*post89 is applied to Tobin’s,

Column (4) is the same thing except instead of tariff*post89 it becomes tariff*post88; post88 has a value

of one (dummy variable). Column (3) tariff*post89 is both a significant and positive value, whereas the

control in column (4) tariff*post88 is quite low and insignificant thus the study is consistent with the

notion competition promotes duality. Lastly Yang makes the assumption that information costs are

cheaper when a duality CEO is present over separated leadership, because “competition increases the

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value of information, especially the value of specific information” 40. To test whether specific information

is cheaper for duality CEO over separated leadership the sample from above is separated into two

groups. Firms “with above-medium values of information specificity costs and firms with below-median

values” 41 and run a base line regression analysis, the results of which are below in Table 5.

Based on the above table the following points can be concluded. Firstly duality firms with above-median

ratios of assets Tobin’s Q increases notably over that of non-duality firms of the same caliber, as

exemplified by before regression Tariff*post89*dual= 3.061 (duality) compared to Tariff*post89= -0.899

(non-duality). However both duality and non-duality firms with below media rations experience similar

albeit insignificant change.

Conclusion:

Agency theory and stewardship theory, are essentially equals and whether a company chooses

one form of corporate governance over another comes down to nothing more than which form is a

better fit for the firm based on a few main factors (industry, market environment, CEO informal power,

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firm performance) therefore CEO duality had no impact at all on a firms performance. However, the

preceding turned out not to be the case, if anything the original hypothesis was nothing more than a

patchwork of conjecture, mixed with a few odd facts. The truth is CEO duality for better or worse is

imminently tied into firm performance. Throughout this paper it has been shown that CEO duality even

when not being utilized as a way of governance is still influencing, take for instance Sydney Finkelstein’s

findings of how informal CEO power, vigilant boards, CEO duality, firm performance and a whole host of

other things were all interconnected. For example if firm performance was high and CEO informal power

high, a board would not want a duality CEO for fear of entrenchment, whereas when competition is high

or firm performance is low CEO duality is sought after like a fox by a hound. Essentially whether

stewardship (CEO duality) is used by firm, is meaningless for it has already influenced their decision to

by avoiding it. In short CEO duality is the single most important factor in determining what structure of

corporate governance is chosen by a firm.

Footnotes: Could not fit into actual footnote area without compromising integrity of the entire papers structure my apologies.

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1) Elsayed, Khaled. 2007. "Does CEO Duality Really Affect Corporate Performance?" Corporate Governance 15 (6): 1203-1214.Ibid. 1

2) Ibid. 12043) Ibid. 12044) Ibid. 12055) Forbes citation6) FINKELSTEIN, S., and R. A. D'AVENI. 1994. "CEO DUALITY AS a DOUBLE-EDGED SWORD: HOW

BOARDS of DIRECTORS BALANCE ENTRENCHMENT AVOIDANCE and UNITY of COMMAND." Academy of Management Journal 37 (5): 1079-1108. doi:10.2307/256667.

7) Ibid. 11008) Elsayed, Khaled. 2007. "Does CEO Duality Really Affect Corporate Performance?" Corporate

Governance 15 (6): 1203-1214.Ibid. 19) Yang, Tina and Zhao, Shan, CEO Duality and Firm Performance: Evidence from an Exogenous

Shock to the Competitive Environment (May 1, 2014). Journal of Banking and Finance, Forthcoming. Available at SSRN: http://ssrn.com/abstract=2177403 or http://dx.doi.org/10.2139/ssrn.2177403

10) Reference for business.com page 211) FINKELSTEIN, S., and R. A. D'AVENI. 1994. "CEO DUALITY AS a DOUBLE-EDGED SWORD: HOW


12) Yang, Tina and Zhao, Shan, CEO Duality and Firm Performance: Evidence from an Exogenous Shock to the Competitive Environment (May 1, 2014). Journal of Banking and Finance, Forthcoming. Available at SSRN: http://ssrn.com/abstract=2177403 or http://dx.doi.org/10.2139/ssrn.2177403

13) FINKELSTEIN, S., and R. A. D'AVENI. 1994. "CEO DUALITY AS a DOUBLE-EDGED SWORD: HOW BOARDS of DIRECTORS BALANCE ENTRENCHMENT AVOIDANCE and UNITY of COMMAND." Academy of Management Journal 37 (5): 1079-1108. doi:10.2307/256667.

14) Yang, Tina and Zhao, Shan, CEO Duality and Firm Performance: Evidence from an Exogenous Shock to the Competitive Environment (May 1, 2014). Journal of Banking and Finance, Forthcoming. Available at SSRN: http://ssrn.com/abstract=2177403 or http://dx.doi.org/10.2139/ssrn.2177403

15) Ibid. 1116) FINKELSTEIN, S., and R. A. D'AVENI. 1994. "CEO DUALITY AS a DOUBLE-EDGED SWORD: HOW


17) Ibid. 108418) Ibid. 108219) Ibid. 108620) Ibid. 108621) Ibid. 108622) Ibid. 109423) Yang, Tina and Zhao, Shan, CEO Duality and Firm Performance: Evidence from an Exogenous

Shock to the Competitive Environment (May 1, 2014). Journal of Banking and Finance,

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Forthcoming. Available at SSRN: http://ssrn.com/abstract=2177403 or http://dx.doi.org/10.2139/ssrn.2177403

24) Ibid. 1125) FINKELSTEIN, S., and R. A. D'AVENI. 1994. "CEO DUALITY AS a DOUBLE-EDGED SWORD: HOW


26) Ibid. 109627) Ibid 109628) Elsayed, Khaled. 2007. "Does CEO Duality Really Affect Corporate Performance?" Corporate

Governance 15 (6): 1203-1214.Ibid. 129) Ibid. 120630) Ibid. 120631) Ibid. 120632) Ibid. 120933) FINKELSTEIN, S., and R. A. D'AVENI. 1994. "CEO DUALITY AS a DOUBLE-EDGED SWORD: HOW


34) Ibid. 110135) Yang, Tina and Zhao, Shan, CEO Duality and Firm Performance: Evidence from an Exogenous

Shock to the Competitive Environment (May 1, 2014). Journal of Banking and Finance, Forthcoming. Available at SSRN: http://ssrn.com/abstract=2177403 or http://dx.doi.org/10.2139/ssrn.2177403

36) Ibid. 337) Ibid. 4338) Ibid. 4439) Ibid. 1840) Ibid. 18

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Does CEO duality affect company Performance final 2