The benefits and drawbacks of generalist CEOs – those with the talent and skill to manage companies in various industries – have been fiercely debated in contemporary research. Some research touts generalist CEOs’ varied professional experiences and ability to launch a wide range of strategic initiatives. Other research warns of their tendency to switch jobs easily, which may mean that their motivations do not align with those of shareholders and prompt them to give short-term investments priority over above longer-term, but more beneficial, projects.
Our research contributes to the debate by exploring how independent directors view generalist and specialist CEOs. Boards of directors are often considered the ultimate governance mechanism for resolving agency conflicts, and, as outsiders, independent directors are more likely to be impartial. As a consequence, the degree of board independence is often used as a measure of board quality. Since effective board governance leads to shareholder-friendly corporate decisions and activities, a great deal of research demonstrates that independent directors are valuable. Therefore, to the extent that generalist CEOs enhance shareholders’ wealth, independent directors should view them favorably. thai university scholarship
It is, however, challenging to test this argument empirically because, in economics and finance, it is not possible to run a randomized experiment where certain firms are assigned more independent directors than others are. Fortunately, there is a quasi-natural experiment where only certain firms are forced involuntarily to change their board independence by a regulation. This is analogous to a randomized experiment. Interestingly, three economists have just been given a Nobel Prize for their work related to this empirical method (David Card, Guido Imbens, and Joshua Angrist).
In 2002, the Sarbanes-Oxley Act, along with new stock exchange rules, required that publicly traded firms have a majority of independent directors on the board. This requirement served as an unexpected exogenous shock to companies who had to appoint more independent directors to comply. Using a difference-in-difference estimation, we compare, before and after the passage of the law, the change in the general ability of the CEOs of firms forced to appoint more independent directors to the change in the general ability of the CEOs of firms not affected by the law. Firms required to change their board composition were the treatment group, and firms unaffected by the law were the control group.
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