The interaction effects of CEO power, social connections and incentive compensation on firm value

Abstract

Using a regression interaction model and a biographical dataset, with which we can pinpoint periods during which friendships were likely to have developed, we study the relation between company value and the interplay between CEO power, CEO equity incentives and the friendliness of the board of directors. Consistent with our hypotheses developed below, we find that firm value tends to increase when equity incentives are combined with a friendly board of directors, and conclude that the negative effects of CEO power on firm value reported by others are limited to firms with weak CEO equity incentive compensation plans and arms-length boards of directors. We are the first to combine these datasets and show that friendship between powerful CEOs and their boards, when agency problems are mitigated through CEO compensation, leads to higher value.