Powerful CEOs and Corporate Governance

Excessive CEO power is often regarded as value-destroying. We use a quasi-exogenous regulatory shock to analyze whether improved governance helps to channel firms with powerful CEOs toward more value-enhancing corporate policies. We use the Sarbanes-Oxley Act and NYSE/NASDAQ listing rules and focus on firms that were required to improve governance. We find that postregulation firms led by powerful CEOs increase innovation inputs (Research and Development expenditures) and produce more innovation outputs (patents) that are scientifically more important (citations) and economically more valuable (market value of patents). Investment quality also improves, manifesting in better takeover performance and improvements in firm performance and corporate value. Our results suggest that improved governance can mitigate value destruction in powerful CEO-managed firms. We take steps to mitigate econometric concerns and ensure our results are robust to various combinations of fixed effects and control variables.