CEO-Board Cultural Distance

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2022
Authors
Cai, Wei
Qiu, Lin
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Abstract
Divergence in cultural backgrounds between the CEO and directors can play a crucial role in shaping the CEO-board dynamic. Using novel data, we measure the cultural distance between the CEO and directors of U.S. S&P 1500 firms based on their first and last names. Consistent with the theoretical predictions in Hermalin and Weisbach (1998), we find that the CEO-board cultural distance decreases in CEO tenure. Moreover, we find that the CEO-board cultural distance is positively associated with board-monitoring effectiveness. This effect is not driven by director networks or a CEO’s involvement in director nomination. At the same time, we also find that greater cultural distance between a CEO and directors seems to weaken advising and innovation. We also exploit director death and retirement as plausibly exogenous shocks to the CEO-board cultural distance and find robust results. Taken together, our findings highlight the role of CEO-board cultural distance in corporate governance.
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cultural distance, ethnic heritage, CEO-board dynamic, board effectiveness
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