Does market power discipline CEO power? An agency perspective

Abstract

We examine how product market competition (PMC) shapes chief executive officer’s (CEO) power. Using various measures to capture both PMC and CEO power, our analyses, which include a quasi‐natural experiment, find evidence that CEOs have less power when the product market is more competitive. Furthermore, the impact of PMC on CEO power is more pronounced for firms with entrenched management, lower CEO ownership, lower analyst coverage, and for firms experiencing good ‘luck’ (windfall performance). Our results suggest that market power can act as a substitute for corporate governance in disciplining CEO power, particularly when prone to agency problems.