Does CEO duality affect company Performance final 2

7/30/2015 CEO Duality and
Corporate
Performance
Agency or Stewardship?
Byron Main
UNIVERSITY OF SAINT THOMAS

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Table of Contents
Introduction...........................................................................................................................................................................................2
Agency Theory.....................................................................................................................................................................................2-5
Form.................................................................................................................................................................................................3
Advantages.....................................................................................................................................................................................3-4
Hypothesis 1...........................................................................................................................................................................4
Disadvantages.................................................................................................................................................................................4-5
Stewardship Theory................................................................................................................................................................................5
Form.................................................................................................................................................................................................5
Advantages.....................................................................................................................................................................................5-6
Hypothesis 2......................................................................................................................................................................................6
Disadvantages....................................................................................................................................................................................6
Factors...................................................................................................................................................................................................6
Informal CEO Power.........................................................................................................................................................................6-7
Hypothesis 3......................................................................................................................................................................................7
Firm Performance............................................................................................................................................................................7-8
Hypothesis 4......................................................................................................................................................................................8
Competition.......................................................................................................................................................................................8
Hypothesis 5......................................................................................................................................................................................8
Additional Factors...............................................................................................................................................................................8
Hypothesis.............................................................................................................................................................................................9
1-5....................................................................................................................................................................................................9
Final Hypothesis .................................................................................................................................................................................9
Measuring Firm Performance..............................................................................................................................................................9-10
Formula (Elsayed).............................................................................................................................................................................10
Formula (Yang).................................................................................................................................................................................10
Research Design and Results.............................................................................................................................................................10-26
Elsayed design.............................................................................................................................................................................10-14
Finkelstein design........................................................................................................................................................................14-19
Yang design.................................................................................................................................................................................19-26
Conclusion.......................................................................................................................................................................................26-27
Footnotes........................................................................................................................................................................................28-29

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Introduction:
Withthe rise of global interconnectivity, andmultinational corporationsthatspanwhole
continents,engagingwithconsumersthe worldover, “the impactof boardleadershipstructure…on
corporate performance “1
has come intothe spotlight.The mainfocusison the conceptof the duality
CEO (i.e.one whoholdsboththe Chief Executive OfficerandChairmanof the Board).Two mainnotions
on the viewof CEO dualityare Agencyandstewardshiptheories,whichwill be furtherexplainedbelow.
The followingpaperwill showhowanumberof factorsincludingcompanyfinancials,industry,areasof
business,companysize etc. are affectedbyCEOdualityand withperformance indexesprovidingsound
evidence will conclude thatboththe agencyandstewardshiptheoriesare valid givencertainsituations
(contingencytheory). Thus firmperformance isinfluencedverylittle byCEOdualityandmore soby
cornucopiaof componentsthoughfour keyfactorssuch as marketenvironment(competition), industrial
activity, firmperformance,informal CEOpower(influence withinthe company) are the mostinfluential
of all the determinants.
Agency Theory:
To begin,isthe conceptof agency theorywhatsome refertoas vigilantcorporate governance.
In the eyesof many a comprehensiveandoverarchingmanagementinthe moderneraof MNC’s(Multi-
National Corporations)isanabsolute necessitytopreventas JensenandMecklingstatedintheir1976
essay a single agent(some refertoas dualityCEO) fromseeking“tomaximizehiswealthatthe expense
of the shareholders’ value”2
.A continuationof thisbelief waspresentedbyMallinin2001 who
expressedthat“withoutgoodcorporate governancebothcorporate performance andthe investors’

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moneymaybe at risk”3
.To that endagency theoryput simply“Bearle andMeans(1932) isthe
separationof ownershipfrom management“4
. Essentiallyincorporate governance itboilsdownto“a
contract underwhichone or more principalsengage anotherperson(the agenttoperformsome service
on theirbehalf whichinvolvesdelegatingsome decisionmakingauthoritytothe agent” 5
. Aspreviously
stated,an agentunrestrictedwill attempttomaximize ownpersonal happiness,thereforethe principle
fromthe precedingexamplemustensure some sortof oversightovercompanydecisions.
Form:
The most commonformof agencytheoryinmoderncorporationsisthe separationof the CEO
(chief executiveofficer) andthe COB(chairmanof the board). Of course witheach corporation
responsibilitiesbetweenthe COBandCEO will vary.Howeverinmostcasesthe chairman of the board
runs the boardof directors,dealswithexternal funding,setsforthcompensationplans,CEOsuccession
and strategicplanguidance.Meanwhile the Chief ExecutiveOfficerhandles“strategicprocess,
operatingprocess,organizational process” 6
.Movingforward “Agencytheoristshave identifiedboardsof
directorsas a primarymonitoringdeviceprotectingshareholderinterests” 7
.Effective(vigilant) boards
tendto be composedof “a large group of independent,outside directors...individualsnototherwise
associatedwiththe corporation”8
;and tendto owna large percentage of the heldstock.One example
isWarren Buffett(CEOof Berkshire Hathaway),whohaseitherhimself ora proxyonnearlyeverysingle
one of the companiestowhichhe ownsmore than 5% of the outstandingstock(i.e.Duracell,CocaCola).
Advantages:
Outside boardmembersare more effective thanthose promotedfromwithinthe companyfor
three reasons:Firstlythe focusinpurelyonfinancial,andlongtermviabilityof the company.Second;if
performance islowtheyare more likelytocall fora change in strategy/managersforthe firm.Thirdly,
theyare notbeholdentothe CEO,for theirpromotionandthushave the freedomtoact withoutthe

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worriesof retributiveaction.There are a growingnumberof reasonswhymanyscholarsandbusiness
professionalsfeel thatagencytheory(non-dualityCEO) isinfactthe onlyviable formof corporate
managementstructure. Firstlyone of the mainfactorsas statedabove isthat mostfirmstodayoperate
on a global scale andrequire,anagentto carry out tasks,so some sort of oversightof the agenton
behalf of the principle is necessary. A secondimportantfactorhasbeenthe “growingnumberof
financial andaccountingscandalsthathave occurredin several moderncorporations”9
(e.g.WorldCom,
Enron,Wachovia).Inthe case of Enronit was a systematicfailure of the boardtowatch overKenneth
Lay whowas a DualityCEO andappointedmostof the board membersfromwithinthe ranksof the
companyitself.Anotherreasonforthe rise of agencytheoryisgovernmentregulationssetoutby“U.S.
securitiesandexchange commission(SEC) andthe Dodd-FrankActrequire listedfirmseffective 2010 to
disclose reasoningbehindthe boardleadershipstructures” 10
.
Hypothesis(1): In lesscompetitive marketenvironments,largerfirmstendtoembrace agency
theoryand stringentmonitoringtocompensate forlowerlevelsof agentdiscipline frommarket
competition.
Disadvantages:
Withthe above beingstatedthere remainseveral issueswiththe implementationanduse of
agencytheory.The primary problemisthatof agencycosts, whichare definedasthose costsborne by
shareholderstoencourage managers(agents) tomaximize the wealthof shareholdersovertheirown
self-interest. There are three typesof agencycosts: “1) expendituresto monitormanagerialactivities,
such as auditcosts;2) expenditurestostructure the organizationinawaythat will limitundesirable
managerial behavior…3) opportunitycostswhichare incurredwhenshareholder-imposedrestrictions,
such as requirementsforshareholdervotesonspecificissueslimitthe abilityof managerstotake
actionsthat advance shareholderwealth” 11
.These costsare alwayspasseduntothe shareholderand

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therefore representanecessarybutunfortunate cost.Twoothercoststhat are alsoheightenedwith
agencytheoryisthat of information specificity costs (specificinformation thatgivesfirmsahigher
marketpower) and information immediacy costs (costsforlossopportunitiesresultingfrominformation
becomingobsolete).Eachof the above costs ishigherwhena managementstructure followsagency
theoryforthere isan extrachainof command andseparationof responsibilities,slowingdownresponse
time to newinformationandsituations. Lastlyinagencytheoryisthe issue of monitoringthe boardand
COB themselves(whowatchesthe watcher).
StewardshipTheory:
Stewardshiptheory, isthe otherside of the coinfrom agencytheory.Withincorporate
governance stewardship theoryunlikeagencyassumesthatthe agentwill infactaligntheiractionsin
line withthe wishesof aprinciple.Agentsare seenasessentiallyloyaltoa companyand will doanything
to achieve ahighcompanyperformance.
Form:
Agentswhoparticipate in stewardshiptheoryare mostoftenreferredtoas duality CEO’s,for
theyfulfillboththe positionof CEO(chief executiveofficer) andCOB(chairmanof the board) the
commonresponsibilitiesof eachwasoutlinedinthe paragraphabove.
Advantages:
Continuingon, there are several keyadvantagestohavingone personfulfill bothof the
aforementionedpositions. FirstlyCEOduality“establishesastrongand unambiguousleadership” 12
,
whichwould allowforanuninterruptedchainof commandandunambiguousauthorityoverall aspects
of a situation. AlsomayCEOs“mayoftenhave the bestspecificknowledgeof the strategicchallenges
and opportunitiesfacingthe firm” 13
.Inadditionthe “strongCEO leadershipcanhelpfirmsadaptto

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environmental demands”14
.Thislastpointwouldbe exemplifiedbythe “exogenous
shock…implementationof the 1989 Canada-UnitedStatesFree Trade Agreement(FTA) whichincreased
the competition of U.S.firmsbyeliminatingall tariffsandothertrade barriersbetweenthe U.S.and
Canada”15
.Throughvariousstudiesacrossall industriesitwasfoundthatonaverage dualityfirms
outperformedfirmsfollowingagencytheorybyamarginof three percentafterthe (FTA) wentinto
effect16
Alsohavingone managerincharge isthatit confersuponthe shareholdersof the companyand
the publicat large a sense “legitimacy,sendingasignal…thatafirmhas a clearsense of direction”17
.This
signal of continuitycan“create an illusionof stabilityandasense thata dominate leader,notthe
environment,isdeterminingorganizational destiny” 18
.Also,havingone agentincharge lessonsthe
agenciescoststhatwouldbe incurreduponan organizationwithanon-dualitystructure.
Hypothesis(2): FirmswithdualityCEO’sinnovate andadaptmore quicklytonew information,at
lesscostthan firmspossessingseparateCEOandchairmanof the board.
Disadvantages:
Howeverstewardshiptheoryand the dualityCEOare notwithoutissues. Asstatedinthe above
paragraph an agentactingas a dualityCEOmay putpersonal gainovercompanyperformance.Also
havinga dualityCEOincreasesthe riskof entrenchment whichmayasstatedbefore “leadto
opportunisticandinefficientbehaviorthatreducesshareholderwealth” 19
.Finally,havingonlyone agent
incontrol can leadtostatic behaviorbya corporation,whereupononlyone setof ideasispursuedeven
if theymay notbe inthe corporations’principal interest
Factors:
Informal CEO Power:is derivedfromsourcesof influence notdirectlytiedintothe
responsibilitiesrelatingtothe CEO’s official position.CEO’stendtogarnertheirinformal powerthrough
keysourcesforinstance “developingprestigiouscontactswithotherorganizations…managingcritical

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organizational problems…engenderingloyaltywithintheirorganizations…andco-optingboardsof
directors”20
.Highamountof informal powercanbe tantamountto CEO duality,aswell asbe a cause for
entrenchmentwithinthe firm.Giventhe previousstatementvigilantboardstendtobe verywary of
CEO’swithhighamountsof informal power,andthusreducingtheirowninfluence overthe firm,
therefore manyboardswouldchoose anindependentboardchairpersontocounteractthe high
informal powerretainedbythe CEO.
Hypothesis(3): CEO dualitywill tendtobe lowerwhenaCEOpossesseshighinformalpower,
withthe existence of anindependentvigilantboard.
Firm Performance:Both Finkelsteinand KhaledElsayedsee firmperformance asakeyindicator
whetherafirmchoosesdualityCEOor not.Overall firmprofitabilityisanindicationof whetherthe
CEO’sstrategicpoliciesare effective.AccordingtoFinkelstein“whenfirmperformance isgood,strong
boardsmay seektoavoid”21
a dualityCEO forthisruns the riskof entrenchment.A few reasonsforthis
are as follows.Firstlyhighperformance tendstoenhance the statusandinformal powerof the CEO.
Nextitcreatesorganizational slackwhichCEO’smayuse tobenefitthemselvesorthose beneathto
engenderpersonalloyalty.Thirdly“because attributionsof CEOeffectiveness are oftenmade when
firmsare successful…thereislessneedtocreate asense of managerial efficacythrough
duality…stakeholdersmayalreadyperceive firmsoperationsaslegitimate” 22
.Lastlyboardswhose firms
are highperformingare lesslikelytofire the CEO,whommanyperceive tobe responsible forthe good
fortunesof the firm.HoweverCEOdualitycanbe valuedbyvigilantboardswhenoverallperformance is
low,soas to have one overall voice incommandsothat the implementationof aturnaroundstrategy
occurs unimpeded. There are manywaysof measuringfirmperformance some of themwill be
mentionedinthe subsequent sections.AtthismomentFinkelstein’sdefinitionmustsuffice withfirm
performance being “measuredbyreturnonassets(ROA),acommonindicatorof short-term
performance,calculatedasnetincome dividedbytotal assets”23
.

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Hypothesis(4): Strongperformance bya firmwitha vigilantindependentboardwill resultin
lowerlevelsof CEOduality.
Competition(Yang):Competition,more specificallyhow wellacompanywithinanindustry
faresinvariouslevelsof competition.The situationbeingutilizedwasmentionedinthe above
paragraph onstewardshiptheoryasthe passingCanada-UnitedStatesFreeTrade Agreementof 1989
whichremovedall barriersbetweenthe twonations.Thisagreementinstitutedthe world’slargest
“bilateral trade betweenCanadaand the U.S.”24
.The new Canadianimportstendedtocompete directly
withproductsprovidedbyU.S.basedfirm, the FTA become “associatedwithsubstantialemployment
loss,laborproductivitygains,andreductioninprice-costmargin”25
.The precedingstatementsuggests
that the FTA broughtincreasedcompetitiontoU.S.firmstherefore isaperfectmeasure forhow CEO
dualitywill effectfirmperformance indifferinglevelsof marketcompetition.
Hypothesis(5): Firmsfollowingstewardshiptheorywill be more commonandoutperformfirms
followingagencytheory,wheneverthere isasignificantincreaseincompetition,inthe market
environment.
Additional Factors: The followingfactorswill eitherbe controlledfororutilizedinthe formulas
that the researchexperimentsbelow are basedon.
 FirmSize- howlarge a firmisin relationtoitssales.“Measured asthe natural logarithm
of netsales…total assetsandnumberof employeesare twoalternativemeasures” 26
that may be utilizedif netsalesisnotavailable.
 Non-Productionoverhead- “Thisvariableismeasuredasthe ratioof general,selling,and
administrativeexpensestosales”27
.
 CEO shareholdings:isthe proportionof afirm’stotal sharesownedbythe CEO.
 Industrysegments:utilizedwhentryingtoexamine justone particularindustrysegment
across multiple companieswitheveryfirmhavingmultiple industrysegments.Therefore
dummyvariablesare createdforindustrysegmentsthatare notpart of the analysis.
 CEO duality- give variablestofirmsonthe basisof eitherfollowingagencyor
stewardshiptheory.Foragencyvalue=0,stewardshipvalue=1
 Board size- numberof directorssittingonthe board

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 Institutionalownership- referstothe ownership stake inafirmthat isbeingretainedby
financial organizations,endowments,orpensionfunds(CalPERS).Organizations suchas
these routinelypurchase greatquantities of afirms outstandingsharesand thereby
wieldconsiderableinfluence onmanagement.
 Debtratio (Elsayed) - canbe shownas the ratio of total debtto total assets.
 Capital Intensity(Elsayed) –isthe ratio of net fixedassetstototal assets.
RevisedHypothesis:
1) In lesscompetitive marketenvironments,largerfirmstendtoembrace agency theoryand
stringentmonitoringtocompensate forlowerlevelsof agentdisciplinefrommarket
competition. Yang15
2) FirmswithdualityCEO’sinnovate andadaptmore quicklytonew information,atlesscost
than firmspossessingseparate CEOandchairmanof the board.
3) CEO dualitywill tendtobe lowerwhenaCEOpossesshighinformal power,withthe
existence of anindependentvigilantboard.
4) Strongperformance bya firmwitha vigilantindependentboardwill resultinlowerlevelsof
CEO duality.
5) Firmsfollowingstewardshiptheorywillbe more commonandoutperformfirmsfollowing
agencytheory,wheneverthere isasignificantincrease incompetition,inthe market
environment.
Final Hypothesis(overall):There isnot one optimal leadershipstructure (i.e.agencyor
stewardshiptheory),asbothhave costsand benefitsthatwill succeedunderthe right
conditionsof competitionlevels(dualitybetterathigherlevels),industrialactivity,current
financial performance,informal powerof CEO.Howeveroverall companieswithdualityCEO’s
do tendto performbetterthanthose withseparatedleadership.
MeasuringFirm Performance:
One of the mainissueswithmeasuringthe effectivenessof CEOduality(stewardshiptheory),in
fact there are two prevailingwaysof measuring firmperformance.One isaccountingbasedas
championedbyMuthand Donaldsonin1998, while the secondandmore widelyacceptedisthe use of
marketvaluationmeasuresespeciallythatof Tobin’sqratio,whichwas firstintroducedbyBarnhartand
Rosensteinin1998 29
. Tobinsq,readilydefinedasthe “ratioof a firmmarketvalue tothe replacement
cost of its assets”30
.Additionally,manyhave arguedthatitisfar more appropriate because it“isa long
termmeasure thattakesrisksand returndimensionsintoaccountandreflectsthe firm’sabilityto
improve performance overtime”31
.
Formula (Elsayed):

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Tobinq values:
 Equilibrium:q=1
 Higherthan expectedinvestmentopportunities:q>1
 Lessprofitable thanexpectedinvestmentopportunities:q<1
Tobinq formulaas usedbyElsayedandformulatedbyChungandPruitt:
 Tobin’sqratio= [MV +BV of preference capital +BV of longtermdebt+ BV of Inventory+BV of
CurrentLiabilities –BV of CurrentAssets]/[TA].
o MV= market value
o BV= bookvalue
The secondformulaformeasuringTobin’sqthat will be used asa measurementof firm performance
withan increase incompetitionisTinaYang’sseminal formula.
Formula (Yang):
Tobins Q= y1tariffi*post89*duali + y2tariffi*post89 +tXit + dt + di + ∑it
 i= index firms
 dt= denotestime,t=1979-1998
 di= denotesfirmfixedeffects
 tariffi=avg. U.S. tariff rate on Canadianimportsforfirmi between1986-1989.
 Post89= 1 if t>1989 otherwise=0
 Duali= 1 if firmhas a stable boardleadershipstructure of CEObeingthe COB(DualityCEO),zero
otherwise
 X= firmcharacteristicsi.e.firmsize,ROA,capital structure,andrisk
 TA= total assets
Research Designsand Results:
In the following sectionaseries of researchdesigns will be used toprove the hypothesis
discussedinanaforementionedparagraph.
KhaledElsayed:

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The firstmeasuringcorporate performance,comesfromKhaledElsayeds’paperDoesCEO
Duality Really AffectCorporatePerformance.InthisessaytodeterminewhetherCEOdualityhadany
impacton performance Elsayedusedasample of firmsfromthe “EgyptianCapital MarketAgencyover
the time period2000 to 2004”32
. Inthisstudy usingthe above mentionedChung/Pruittformulafor
Tobin’sqalongwithboard leadershipstructure asindependentvariable(1=CEOduality,0=otherwise),
corporate performance asthe dependentvariable. Inadditionseveral keyfactors are consideredand
controlledforincluding‘corporate size,debtratio,capital intensity’ all discussedinaprevious
paragraph.Table 1 belowhasdescriptivestatisticsforall variablesusedorcontrolledforinElsayed’s
experiment.
Giventhe above statisticsElsayedattemptstoestimatethe impactCEOdualitymayhave onoverall firm
performance.TotestthismainhypothesisaLeastAbsolute Value modelmustbe utilizedinplace of a
traditional ordinaryof leastsquaresonbothROA,andTobin’sq due to the fact that (OLS) isfar to
affectedbyextreme outliersinobservation,aflaw thatthe LeastAbsolute Value (LAV) model doesnot
share. In the LAV model the medianof dependentvariable(firmperformance) canbe estimated
through“the rawsum of absolute deviationsaroundthe unconditionalmediantofindthe regression
coefficientthatminimize regressionfunctions” 33
.Inotherwordsthe LAV model selectsparametersthat
mitigate anyabsolute residuals.Table 3below will show the LAV regression withCEOdualityas

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independentvariable andfirmperformance shownbyproxywithROA andTobin’sqratiosubstitutedin
itsplace as the dependentvariables.
From the LAV regressionabove itisclearthat CEO Dualityhasalmostnoimpact onfirmperformance as
demonstratedbyROA andTobinsq withvaluesof 0.9483 and0.0154 That issignificantlycontrastedto
institutional ownershipwhose valuesare 0.0467 and0.008 whichbothfall withinthe desiredrange of
values(i.e.p<0.10,p<0.010, p<0.001. HoweverthisLAV regressiondidencompassmultiple industries
whichcouldthrowoff many of the values,especiallyif some hadpositivevalueswhile othersdidnot.
Sayingthat Table 4 breakseverythingdownbyindustry.Inthe followingtable itisseenthat while 5
industrieshadgenerallypositive coefficientsforTobinsqandthus firmperformance there were several
that eitherhadnegative (cement) orinsignificant(steel,constructions,communicationetc.) coefficients.
Table 4 mayimplythatCEO duality isindeedpositivelycorrelatedwithcertainindustriesandnegative
withothers.Howeverthere are far toomany otherpossibilitiesforthese trendstosaythat CEO duality

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alone wasthe cause foroverall firmperformance.Otherpossibilitiesmayinclude thatmostboardswith
highperformingfirmswouldnotwishCEOdualitytooccuras explainedearlierinthe paper.Withthis
belief inmind all industries are separatedintocoefficientvalues(i.e.positive,negative,orinsignificant.
Thisseparationis showninTable 5 below.

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As can be seenfromTable 5 above CEOdualityhasa greaterimpact onlow performingsub-groupROA=
1.512) relative tothe highgroup (ROA=0.982). Thiswouldgive credence to hypothesis4: Strong
performance by a firm witha vigilantindependentboardwill result in lower levelsofCEO duality.
FinkelsteinandD’vani:
The secondexperimentwasdesignedbySydneyFinkelsteinandRichardA.D’Aveni unlike the
precedingElsayeddidnotfocusona sample of large firmsacrossindustries(i.e.ECMA).Instead
choosingtofocus single industrystudiesforafew keyadvantages. Firstly,forthe “differencesaffecting
howvariable interactwithenvironmental contingenciesare controlledforwithgreateraccuracy” finkelstein
1089
.In additionwithinsingleindustrystudiesintrainindustryheterogeneitycanismore easilyrealized.
Lastlysingle industrystudiesrepresentthe perfectplatformtotestnew ideasdue tothe highvalidityof
informationgarneredfromresearch. Tothe actual experimentitself,FinkelsteinandD’Aveni ranitmuch
like Elsayeddidabove withthe exceptionalreadystatedof onlyexaminingon anindustry,nota market
wide level.Tothisend,the printingandpublishing,computers,chemical industrieswereeachanalyzed
separately,totestthe validityof theirhypothesisaboutCEOdualitysince eachindustry“face different
critical successfactorsand have somewhatdifferentpropensitiestoCEOduality” Finkelstein 1090
.Nowonto
the actual formof the studygroupitself whichasstatedpreviouslyconsistedof all firms(public) whose

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primarymarketsegmentwaschemicals,printingandpublishing,orcomputers“accordingto Ward’s
Directory from1984 through1986” 34
.That beingsaidfirmswere notpresentoninthe studyif one or all
of the followingrequirementswentheldtrue.First“Theywere subsidiariesof otherfirms,(2) theyhad
more than 50 percentof theirsalesinbusinessesoutside of theirprimarybusiness…(3) data were not
available”34
.Inthe enda total of 41 firms(printingandpublishing),35firms(chemical), and32 firms
(computers) were analyzedoverathree yearperiodwith107, 102, and 91 observationsforeachof the
industriesrespectively.Thisstudyusedasetof sevenfactorstomeasure how commonCEO dualitywas
withineachindustrythe resultsof whichare inthe tablesbelow,withCEOdualityasthe dependent
variable.
Table 1 above showsall the descriptive statisticsforvariablesinthe printingandpublishing
industry,whiletable 2belowhasdescriptivestatisticsforthe combinedchemical andcomputerindustry
segments.

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Nowgrantedwithoutlogisticregressionanalysis, resultsfromthe twoabove tablescannotbe fully
formed.Howevertwo minorobservationscanbe takenwithacautionarymind.Firstly,observationsof
CEO dualityamongthe three marketsegmentswassignificantlylowerthan the fortune 500 (years1984-
1986 of 82percent. WhereasCEO dualitywas56 percentfor the printingandpublishingsegments;62
percentforthe combinedchemical andcomputerindustries.Secondly“correlationsbetweenboard
vigilance andCEOdualitywere positive forbothgroupsof firms” 34
.Regardlessof the previous
statementnothingcanbe certainuntil regressionanalysisbothonthe printingandpublishing,aswell as
the combinedcomputer,chemical segmentis performedthe resultsof whichcanbe foundbelowon
pages17-18.

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As previouslynotedthe mangoal of thisstudywasthe relationshipbetweenboardsof director andCEO
duality.Thereforethe resultsfromthe above tablesshow the coefficientvaluesof factorsrelate backto
CEO Duality.Take forexample Model 5on tables3 and 4, underthe informal CEOpowerand ROA tabs.
In bothcasesthe numbers(coefficient)ispositive (Model5Table 3 ROA=0.082, CEOIP=0.180), meaning
that the higherreturnon assetsaswell as highinformal powerbythe CEO wouldresultinfirms less
likelyfollowingagencytheory. Firmwouldbe more likelytofollow if the interactiontermswere
negative.Essentiallydependingonthe signof the interactiontermsinrelationto the vigilantboard,
dualitymaybe more or lesslikelytooccur.Additionally,several otherimportantfactscame tolight.The
firstbeingina model where interactionterms(informalCEOpower,ROA etc.) boardvigilance andCEO
dualityhadpositive correlations.“Whenotherinfluencesheldconstant…vigilantboardsare more
concernedwithunityof commandthanwithentrenchmentavoidance”35
.Secondly,whenCEOinformal
powerisveryhighvigilantboardsshifttheirfocusawayfromunityof commandand beginpracticing
agencytheoryto avoidentrenchment.
Tim Yang, Shan Zhao:
The last studythat will be utilizedcomesfromthe aforementionedTimYang,andShan Zhaoin
theiressay CEODuality, Competition,and FirmPerformance.Theiressaycentersonthe core belief that
afterthe applicationof anexogenousshock (i.e.unexpectedevent),firmsfollowingstewardshiptheory
(dualityCEOs) tendtoperformbetterthanthose withseparatedleadership.The studyfocusedonU.S.
firmswhowere directlyaffectedbythe Canada-UnitedStatesFreeTrade Agreementof 1989 (the
exogenousshock).Aspreviouslystatedthe FTA increasedcompetitionforU.S.firmsby significantly
loweringoreliminatingall trade barrierswithCanada.Like Elsayed,YangandZhaoutilize Tobin’sq.
Howevertheirpurpose istocreate a “baseline model toestimate the impactof boardleadership
structure on firmvalue”36
givenanexogenousshock.The formulaabove mentionedisasfollows:

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Formula (Yang):
Tobins Q= y1tariffi*post89*duali + y2tariffi*post89 +tXit + dt + di + ∑it
 i= index firms
 dt= denotestime,t=1979-1998
 di= denotesfirmfixedeffects
 tariffi=avg. U.S. tariff rate on Canadianimportsforfirmi between1986-1989.
 Post89= 1 if t>1989 otherwise=0
 Duali= 1 if firmhas a stable boardleadershipstructure of CEObeingthe COB(DualityCEO),zero
otherwise
 X= firmcharacteristicsi.e.firmsize,ROA,capital structure,andrisk
 TA= total assets
Yang’s formulaallowsthe use anexogenousshocksuchasthe FTA of 1989, to studythe effectof
endogenouschoice (i.e.boardleadershipstructure)willhave onoverall firmperformance as
competitionincreases.Thisisdone bycomparing performancesof dualityandnon-dualityfirmsaffected
by the liberalizationof trade restrictionscourtesyof the FTA,tothe performancesof dualityandnon-
dualityfirmsthatare not affectedbyFree Trade Agreementof 1989. This actionwill mitigate the
unwantedinformationcourtesyof unobservedheterogeneitiesbetweenstewardship(duality) and
agency (non-duality) firms.Nextafewrestrictions(controls) thatwill mitigatethe issue of endogenously
turnoverof all firmsare as follows.Firstlyonlyfirmswithstable leadership(board) thatexistedpre FTA
of 1989 will be considered.A boardisconsideredstable“if itdoesnotchange leadership(dual)formore
than 80% of firmyearsfor a minimum of fouryearsfrom1988 to 1998 37
. Additionallyforfirmswith5-9
yearsof boarddata, leadershipcanonlybe differentinone of the sample years,andfor 10 yearsthe
board leadership statuscanonlybe differentintwoyears. Alsoafirm“cannot be a utilityora financial
institution,haspositivevaluesof total assetsandnetsales,hasdailystockreturnsfor at leastone
quarterof the fiscal year…and hasCompustatdata before 1989. Aftermeetingall theserequirements
the final sample contained1,927(1,181 dual leadership,746 separate leadership) firmsobservedduring
the 1979 to 1998 time periodfora total of 27,345 betweenthe two categories.Followingthe previous
statement,isareturnto Tobin’sq whichisthe primarymeasure of firmperformance,foritstatesthe

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neteffectof changesinall of a firm’saspects.Additionallythe impactof ROA (returnonassets),ROE
(returnonequity),aswell asmarketshare on dualityare reported.HoweverlikeElsayedcontrolsare
put inplace for all otherdescriptivecharacteristicsthatmay affectTobin’sQ.These beingfirmsize,
current-yearROA,growth opportunities,capital structure andmanyothers whichare laidoutbelowin
Table 1.
Variable Name Variable Description [computation presented using WRDS variablenames]
Tariff Average US tariffrate onCanadian imports for a firm from1986to 1988. Operationally, wefirst obtainthe
averagetariff ratefor eachU.S. industry onCanadianimports atthe4-digitSIC level for 1986-1988. We then
compute firm-level tariffrates,by multiplying theindustry-level tariffrate withthepercentofthe firm’s
segment sales over thefirm's total sales and thensumming those products. Weobtain the data on segment
sales from Compustat Segmentprovidedby theWhartonResearchData Services (WRDS).
Dual
Firm operating characteristics
Dummy variablethatequals one, ifthe firm has a stableduality status for 1988-1998; or zero, ifthe firmhas
a stable non-duality status for 1988-1998.
We define a firm as having a stable duality (non-duality) status,ifthe firm has a CEO (a director other than
the CEO) as the Chairman oftheBoard(COB) for morethan 80% firm years for a minimumoffour years
from 1988 to 1998.
Tobin's Q Market valueofcommon equity minus book valueofcommon equity plus book valueoftotalassets, over
book valueoftotalassets [(prcc_f*csho-ceq+at)/at]
Firm size Naturallogarithm oftotalbook assets
[ln(at)]
Return on assets (ROA) Earnings beforeinterest, taxes and depreciation(EBIT) over book value oftotal assets
[(oiadp+dp (ifnot missing))/at]
Return on equity (ROE) EBITover common equity
[(oiadp+dp(ifnot missing))/ceq]
R&D ratio R&D expenditure over sales
[xrd/sale]; xrd=0,ifmissing.
Debt ratio Long-term debt over totalassets
[dltt/at]
Volatility Standarddeviationofdailystock returns*thesquarerootof252
We computestock return volatility ifthestock was traded for at least a quarterofthe year.
Ratio of intangibleassets Intangibleassets overtotalbook assets
[intan/at]; ifnegative, thenzero (onesuchobservation)
Ratio of advertising expense Advertising expense over sales
[xad/sale]
Ln(#business segments) Naturallogarithm ofthenumber ofbusiness segments, in whichthefirmoperates
Altman z-score Altman (1968) z-score, as modified by MacKie-Mason (1990)
[(3.3(oiadp+dp(ifnot missing))+sale+1.4*re+1.2*(act-lct)))/at]
Change in marketshare Sales growth minus theindustry-yearaverage(Frésard(2010))
zCash The cash-to-assets ratio minus industry-year mean, over the industry-year standard deviation (Fresard
(2010)).
Sales per employees Sales over total numberofemployees
[sale/(emp*1000)]
Overhead expense Selling, General andAdministrativeExpenseoversales
[xsga/sale]

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22
Input costs Costs ofgoods soldover sales
[1-cogs/sale]
Wage Employee wage
[(xlr*1000)/emp]
Movingforward Table 2 panelsA shows “keycharacteristicsfor1,927 unique firmsfrom1979 to 1998,
partitionedbywhetherafirmisprotectedbyU.S. tariff on Canadianimports(Tariff>0) priorto1989.
%Dual
Board size
%Outsider
%D&O
%Institution own
Percent offirms with stable duality status
Total number ofdirectors on the board
Percent ofnon-executivedirectors on the board
Percent ofdirector and officer ownership
Percent ofinstitutional ownership

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23
Variablesare asdescribedinTable 1.R&D is winsorizedat99%.ROE andsalesgrowthare winsorizedat
1% at bothtails”43
.
From Panel A above,itisclearthat firmswhose productsare protectedbytariffstendto be larger,and
more diversifiedthantheirunprotectedbrethren.Protectedfirmsalsotendtohave higherROA(A) 8%
before 1989, than unprotected firms(B) 7.32% That beingsaidunprotectedfirmshave higherTobin’sq
mean:A=1.70 comparedto B=1.61. Additionallytheseunprotectedfirmsusuallyhave highersales
growthand more volatility inthe stock meanB= 48.46%, meanA=46.27%. Most likelybasedupon
companyperformance aswell asinvestorconfidence.HoweverforfirmA whentariff istakenawayROA
decreasesto6.12%, while stockvolatilityincreasesto55.75%.
One the otherhand “Panel B reportssummarystatisticsof keygovernance variablesfor1988-1998, the
time periodforwhichgovernance dataare available.Teststatisticsfordifferencesinmean(Meandif)
are basedontwo-sample t-test.Teststatisticsfordifferencesinmedian(Mediandif)”39
.
The above image showsapositive correlationbetweentariff protectionandboardsize,alsothere tends
to be a higherpercentage of outsidersonboardsof firmsthathave tariff protection66.64% compared
to 61.40% for firmsnotundertariff protection. Lastlyfewerboardsundertariff protectionhave duality

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24
CEO’swithonly61.78% comparedwithfirmsnotunderprotective tariff where dualityCEO’smake up
63.122% of all leadershipstructures,a1.44% observable difference. Finally the mainresults,the impact
of dualityonTobin’sq.FirstlyTobin’sqisreportedandutilizedasa medianvalue tominimize the effect
broughton by extreme outliers.Accordingto TinaYang “forthe entire sample of 27,345 firm-year
observationsthe meanvalue of Qis1.73 and medianis1.31 witha standarddeviationof 1.65”. Table
three below reportsregressionestimationof the impactof boardleadershipon overallfirm
performance,withall modelstakingintoaccountcontrol forfirm-level clusters.

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25
Table 3, as mentionedinthe precedingstatementdealswithduality’simpactonfirmperformance,
usingTobinQ as a measure.Column(1) isa baseline andthe coefficientof variable interest
tariff*post89*dual ishighlypositive,whichgivesevidence thatdualityperformsbetterascompetition
increases.Columns(3) and(4) are the actual validitytest.In(3) tariff*post89isappliedtoTobin’s,
Column(4) isthe same thingexceptinsteadof tariff*post89itbecomestariff*post88;post88has a
value of one (dummyvariable).Column(3) tariff*post89isbotha significantandpositivevalue,whereas
the control in column(4) tariff*post88is quite low andinsignificantthusthe studyisconsistentwiththe
notioncompetitionpromotesduality.LastlyYang makesthe assumptionthatinformationcostsare
cheaperwhena dualityCEOispresentoverseparatedleadership,because “competitionincreasesthe

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26
value of information,especiallythe value of specificinformation” 40
.Totestwhetherspecific
informationischeaperfordualityCEOoverseparatedleadershipthe samplefrom above isseparated
intotwo groups.Firms“withabove-mediumvaluesof informationspecificitycostsand firmswith
below-medianvalues”41
andrun a base line regressionanalysis,the resultsof whichare below in Table
5.
Basedon the above table the followingpointscanbe concluded.Firstlydualityfirmswithabove-median
ratiosof assetsTobin’sQincreasesnotablyoverthatof non-dualityfirmsof the same caliber,as
exemplified by before regression Tariff*post89*dual=3.061 (duality) comparedtoTariff*post89= -0.899
(non-duality).Howeverbothdualityandnon-dualityfirmswithbelow mediarationsexperience similar
albeitinsignificantchange.
Conclusion:
Agencytheoryandstewardship theory,are essentially equalsandwhetheracompanychooses
one formof corporate governance overanothercomesdowntonothingmore thanwhichformis a

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27
betterfitforthe firmbasedona fewmainfactors (industry,marketenvironment,CEO informal power,
firmperformance) thereforeCEOdualityhadnoimpactat all ona firmsperformance. However,the
precedingturnedoutnotto be the case, if anythingthe original hypothesiswasnothingmore thana
patchworkof conjecture,mixedwithafew oddfacts.The truth isCEO dualityforbetteror worse is
imminently tiedintofirmperformance.ThroughoutthispaperithasbeenshownthatCEO dualityeven
whennotbeingutilizedasa wayof governance isstill influencing,take forinstance Sydney Finkelstein’s
findingsof howinformal CEOpower,vigilantboards,CEOduality,firmperformanceanda whole hostof
otherthingswere all interconnected.Forexample if firmperformance washighandCEOinformal power
high,a board wouldnotwanta dualityCEO forfearof entrenchment,whereaswhencompetitionishigh
or firmperformance islowCEOdualityissoughtafterlike a fox by a hound.Essentiallywhether
stewardship(CEOduality) isusedbyfirm, ismeaninglessforithasalreadyinfluencedtheir decisionto
by avoidingit.InshortCEO dualityisthe single mostimportantfactorindeterminingwhatstructure of
corporate governance ischosenbya firm.

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28
Footnotes:Couldnotfitintoactual footnote areawithoutcompromisingintegrityof the entirepapers
structure my apologies.
1) Elsayed,Khaled.2007."DoesCEO DualityReallyAffectCorporate Performance?"Corporate
Governance 15 (6):1203-1214.Ibid. 1
2) Ibid.1204
3) Ibid.1204
4) Ibid.1205
5) Forbescitation
6) FINKELSTEIN,S.,andR. A. D'AVENI. 1994. "CEO DUALITY AS a DOUBLE-EDGED SWORD: HOW
BOARDSof DIRECTORSBALANCEENTRENCHMENT AVOIDANCEandUNITY of COMMAND."
Academyof ManagementJournal 37 (5): 1079-1108. doi:10.2307/256667.
7) Ibid.1100
8) Elsayed,Khaled.2007."DoesCEO DualityReallyAffect Corporate Performance?"Corporate
9) Yang, Tinaand Zhao,Shan, CEO DualityandFirmPerformance:Evidence fromanExogenous
Shockto the Competitive Environment(May1,2014). Journal of BankingandFinance,
Forthcoming. AvailableatSSRN:http://ssrn.com/abstract=2177403 or
http://dx.doi.org/10.2139/ssrn.2177403
10) Reference forbusiness.compage 2
11) FINKELSTEIN,S.,andR. A. D'AVENI.1994. "CEO DUALITY AS a DOUBLE-EDGED SWORD: HOW
Forthcoming.AvailableatSSRN: http://ssrn.com/abstract=2177403 or
15) Ibid.11
17) Ibid.1084
18) Ibid.1082
19) Ibid.1086
20) Ibid.1086
21) Ibid.1086
22) Ibid.1094

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24) Ibid.11
26) Ibid.1096
27) Ibid1096
28) Elsayed,Khaled.2007."DoesCEO DualityReallyAffectCorporate Performance?"Corporate
29) Ibid.1206
30) Ibid.1206
31) Ibid.1206
32) Ibid.1209
33) FINKELSTEIN,S.,and R. A. D'AVENI.1994. "CEO DUALITY AS a DOUBLE-EDGED SWORD: HOW
34) Ibid.1101
35) Yang, Tinaand Zhao,Shan, CEO Duality andFirmPerformance:Evidence fromanExogenous
Forthcoming.AvailableatSSRN:http://ssrn.com/abstract=2177403 or
36) Ibid.3
37) Ibid.43
38) Ibid.44
39) Ibid.18
40) Ibid.18

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