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In the CEO We Trust: Negative Effects of Trust Between the Board and the CEO

Published online by Cambridge University Press:  13 June 2023

Kee-Hong Bae Open the ORCID record for Kee-Hong Bae [Opens in a new window] ,
Sadok El Ghoul ,
Zhaoran (Jason) Gong  and
Omrane Guedhami
Kee-Hong Bae*
Affiliation:
York University Schulich School of Business and ECGI
Sadok El Ghoul
Affiliation:
University of Alberta Campus Saint-Jean elghoul@ualberta.ca
Zhaoran (Jason) Gong
Affiliation:
Xi’an Jiaotong-Liverpool University International Business School Suzhou Department of Finance Zhaoran.Gong@xjtlu.edu.cn
Omrane Guedhami
Affiliation:
University of South Carolina Darla Moore School of Business omrane.guedhami@moore.sc.edu
*
kbae@schulich.yorku.ca (corresponding author)
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Abstract

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In this study, we investigate whether and how trust between board members and the CEO (board–CEO trust) affects the performance of mergers and acquisitions. Contrary to conventional wisdom, we find that firms with higher levels of board–CEO trust exhibit poor M&A performance. High trust is associated with low acquisition announcement returns, long-term stock return performance, and post-deal operating performance. This negative effect of board–CEO trust is more pronounced among acquiring companies prone to agency problems. Our results suggest that, in the institutional setting of corporate boards, high trust can be too much of a good thing.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 59 , Issue 6 , September 2024 , pp. 2899 - 2932
Creative Commons
Creative Common License - CCCreative Common License - BY
This is an Open Access article, distributed under the terms of the Creative Commons Attribution licence (https://creativecommons.org/licenses/by/4.0), which permits unrestricted re-use, distribution and reproduction, provided the original article is properly cited.
Copyright
© The Author(s), 2023. Published by Cambridge University Press on behalf of the Michael G. Foster School of Business, University of Washington

Footnotes

We thank the reviewer for insightful and constructive comments that greatly improved the article. We are grateful for comments from Warren Bailey, Nancy Buchan, Pierre Chaigneau, Ming Dong, Pouyan Foroughi, Melissa Frye, Louis Gagnon, Vidhan Goyal, Kiridaran Kanagaretnam, Jun-Koo Kang, Ambrus Kecskés, Kai Li, Lilian Ng, Duc Duy (Louis) Nguyen, Yihui Pan, Ari Pandes (NFA discussant), Jin Wang, Wei Wang, and Xiangang Xin. We also thank seminar participants at Queen’s University, Lingnan University, and Korea University, and participants at the 2020 Northern Finance Association meeting, the 2020 Financial Management Association meeting, and the 2020 Southern Finance Association meeting. Bae and El Ghoul appreciate the generous financial support from Canada’s Social Sciences and Humanities Research Council.

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