CEO power and firm opacity

ABSTRACT

This paper examines the association between CEO power and firm opacity. We discuss the entrenchment and managerial power theories to develop a coherent hypothesis that captures a negative relationship. To investigate the relationship, we use CEO pay slice (CPS) and opacity index as proxies for CEO power and information environment, respectively. With alternate model specifications, we consistently find that firm opacity is positively associated with CPS. With the findings, we conclude that powerful CEOs pursue greater firm opacity–leading to poorer information environments–to hide, if any, agency issues or poor firm performance.

KEYWORDS:

• Executive Compensation
• CEO power
• pay disparity
• opacity
• transparency

JEL CLASSIFICATION:

• L140
• L230
• L250
• M210

Disclosure statement

No potential conflict of interest was reported by the authors.

Notes

¹ For instance, a higher CPS is associated with lower Tobin’s Q, lower accounting profitability, greater likelihood of a CEO’s obtaining lucky option grants, and lower performance sensitivity to CEO turnover.