CEO Entrenchment and Performance: New Evidence Using Nonlinear Principal Component Analysis

This study revisits the link between CEO Entrenchment and performance from a sample of 1.040 annual observations concerning 138 CEOs of French-listed firms for the 2000-2013 period. The effect of entrenchment, which seems to represent an illustration of the effectiveness of control mechanisms that CEOs are supposed to undergo within firms, reveals ambiguous findings. The financial woes, suffered by some firms such as France Telecom, Vivendi Universal and Eurotunnel testify to the magnitude of this inefficiency and usefulness to discuss corporate governance principles. The VIENOT reports 1 and 2 and the Bouton report have come forward presenting recommendations aimed at implement a system of corporate governance where moral ethics of different actors, confidence, transparency and respect for the interests of stakeholders are consistent. The purpose of this paper is thus to understand the impact of entrenchment on French firm performance. A key aspect of our study is the use of Nonlinear Principal Component Analysis (NLPCA), which is preferred to standard principal component analysis as a more effective method to distill the complex dimensions of CEO Entrenchment into reliable summary scores. Using fixed/random effect models which control of different source of heterogeneity, we find that CEO Entrenchment has a modest association with operating measures of performance (i.e. ratio of earnings to total assets, ROA) and with market-based measures of performance (i.e. Tobin’s Q). The empirical findings also indicate that the magnitude of the economic significance of the entrenchment proxies in the performance models depends on the method utilized to measure CEO Entrenchment.