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CEO-director ties and labor investment efficiency

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  • Khedmati, Mehdi
  • Sualihu, Mohammed Aminu
  • Yawson, Alfred

Abstract

We examine the impact of CEO-director ties on labor investment efficiency. Using an aggregate measure of CEO-director ties we find that CEOs who have strong ties with independent board members are associated with inefficient labor investment. The effect is stronger in firms that rely more on skilled labor and those that are financially constrained, and that inefficient labor investment exacerbates labor cost stickiness. Our results are robust to selection bias, endogeneity concerns, and alternative explanations. Overall, the results are consistent with the view that stronger CEO ties to independent board members makes monitoring ineffective, which, in turn, aggravates the inefficient labor investment problem. Thus, we identify a potential channel through which CEO-director ties can be detrimental to shareholder value.

Suggested Citation

  • Khedmati, Mehdi & Sualihu, Mohammed Aminu & Yawson, Alfred, 2020. "CEO-director ties and labor investment efficiency," Journal of Corporate Finance, Elsevier, vol. 65(C).
    • Handle: RePEc:eee:corfin:v:65:y:2020:i:c:s092911991830782x
    DOI: 10.1016/j.jcorpfin.2019.101492
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