Abstract/Summary

This study examines the impact of CEO power (formal and informal) on company performance. Does a relationship exist between the CEO’s power and the company’s financial performance (share price performance, return on assets and Tobin’s Q)? Over the past decades considerable work has been conducted by several researchers and scholars in the field of finance, investment, economics and accounting to determine the factors that influence a firm’s share price and value in the stock market. Recent debates shows that scholars are still limiting themselves and yet to look beyond the traditional factors and their fields of discipline to a broader perspective including other possible behavioural determinants of share price performance. This research goes beyond the traditionally known determinants to investigate the impact of CEO power on three performance measures in the stock market. The research, a cross-sectional study employed both primary and secondary data. Using survey research design, the research utilised a questionnaire to collect data from 391 professionals (respondents) in the market. The questionnaire is comprised of two scales, one scale was adapted from existing published research (The Board Assessment instrument) by Dulewicz and Gay (1995) designed to measure the personal competencies of Directors and a CEO power dimension scale designed by the researcher to measure other aspect of personal power. Building on extant literature, the research model was built and tested seven hypotheses related to each of the key variables. Seven were supported for share price performance, four for ROA and one for Tobin’s Q. Three hypotheses were not supported for ROA and six for Tobin’s Q. The empirical investigation involved the use of factor analysis, reliability, correlation and hierarchical regression analysis to establish the relationship between CEO power and three company performance measures. Overall, the results of this study reveal that when the possible effect of firm size was controlled for, CEO power has a significant positive effect on company financial performance as measured by share price performance, ROA and Tobin’s Q. These results support the theories of agency, entrepreneurial, institutional, resource based, leader life cycle and contingency. They results support theoretical explanations and views that powerful CEOs are more likely to be innovative, to give force and direction to corporate strategy thereby increasing entrepreneurialism, to take risky strategic decisions that generate an average higher profits for shareholders than are less powerfully positioned CEOs (Haleblian and Finkelstein, 1983; Adams et al., 2005; Fahlenbrach, 2009; Emdadul et al., 2013). In addition, ability power is good, structural power and ownership power are in general harmful at some level, but can be made benign through effective external monitoring by institutional investors or through regulations (Kim and Lu, 2008). Finally, the results proved robust to tests for possible endogeneity. The research study made a key theoretical contribution to the literature in fields of organizational behaviour and finance as it brought together a new and comprehensive CEO power model and a new set of CEO competencies and power rating scales. The development of the CEO power model has helped to explain the relationship between the variables under investigation. It has also improved the understanding of the factors that influence company financial performance. The study clearly supports the work of other authors (such as Haleblian and Finkelstein, 1983; Adams et al., 2005, 2009, Boyatzis, 2007; Kim and Lu 2008, 2011; Martinez and Stohr, 2005; Fahlenbrach, 2009; Luo et al., 2012; Emdadul et al., 2013; Abebe and Alvarado, 2013) that CEO power affects company value. Additionally, the findings from the new CEO competencies rating scale and power dimension scale used in the study, were both supported by Dulewicz and Gay’s (1995) and Dulewicz and Herbert’s (1999) work. Finally, the research made a unique contribution to knowledge and practice. Findings offer practical investment and portfolio strategies. Suggestions can be used for design and selection of stocks for equity portfolios. The findings of this strand of research suggest that based on available evidence superior returns can be made and wealth preserved in the long run in emerging markets like Nigeria. This offers support to Siganos (2012), Elze (2012) and Emdadul et al., (2013). This study made a distinctive contribution by using exclusively Nigerian data in an emerging market.