Exploring the impact of CEO power on firm performance in an emerging economy: The role of firm risk and board power / Kashif

Kashif, Kashif (2023) Exploring the impact of CEO power on firm performance in an emerging economy: The role of firm risk and board power / Kashif. PhD thesis, Universiti Malaya.

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Abstract

In recent decades, the importance of corporate governance (CG) has surged, emphasizing the role of CEOs in firm decision-making, particularly in financial matters. Grounded in the approach/inhibition theory of power from social psychology, this research investigates how CEO power dimensions influence firm outcomes. The approach/inhibition theory of power posits that individuals in positions of power, such as CEOs, are more likely to exhibit approach behaviours, characterized by assertiveness, optimism, and goal-driven actions. In contrast, those with diminished power tend to display inhibition behaviours, marked by caution and risk aversion. This study specifically examines the influence of CEO power, encompassing (structural, ownership, prestige, expertise, and family) powers, on firm risk and performance. It hypothesizes that CEOs with pronounced power dimensions, driven by the approach tendencies inherent with power, might be more inclined to take risks. Additionally, the research explores the moderating role of board power in the relationship between CEO power and firm risk and the mediating role of firm risk between CEO power and firm performance. Data was sourced from 110 public limited companies listed on the Pakistan Stock Exchange (PSX) from 2008 to 2019. Using the Generalized Method of Moments (GMM) estimation in Eviews version 9, the findings indicate positive correlations between CEO structural, ownership, expertise, and prestige power with both firm risk and performance. Family power, however, showed no significant impact. The mediating effect of firm risk was also significant. Board power was observed to moderate the relationship between CEO power dimensions and firm risk. These results suggest that in firms with pronounced board power, CEOs with structural or ownership power, despite their inherent approach tendencies, lean towards risk aversion, increasing agency costs. Conversely, CEOs with prestige or expertise power exhibit risk-seeking behaviours, even amidst a powerful board, reducing agency costs. The findings emphasize the need to consider the diverse dimensions of CEO power when assessing firm risk and performance. The dynamics between CEO power and firm risk should also account for board power's presence. Interestingly, board power does not always positively influence firm risk. Thus, corporate boards should be tailored considering the CEO's power dynamics, assisting investors in making informed decisions about CEO-board compositions.

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