Excessive Power Of CEO, External Governance, And Corporate Risk Taking

As an important manager and participant in the corporate governance, CEO's decisions have an important influence on corporate risk taking, and different external governance environment will also have impact on CEO's decision behavior, ultimately affecting the risk taking and performance of corporate.Based on the managerial power approach and optimal contract theory, we draw lessons from Landier et al.2012 residual model, defining and calculating the excessive power of CEO, using corporate earnings volatility as the proxy variables for corporate risk taking. Coordinated from " the Convergence of Interest effect", "the entrenchment effect" and " effect of item difficulty on overconfidence ", this paper analyzed the relationship between CEO's excessive power and the risk-taking of corporate. Furthermore, we examined the regulating effect of marketization level, the rule of law to protect investors and government intervention on the relationship.Based on the data of China's non-financial listed companies in 2005-2013, we made an empirical analysis and drew the following conclusions:there is a "U" shaped relationship between CEO's excessive power and corporate's risk taking. When the CEO has some excessive power, "the entrenchment effect" is stronger than" the convergence of Interest effect , and CEO will consider more for its own sake, prevent other members from risk investment. But when the CEO has too much power over the critical value, " effect of item difficulty on overconfidence will dominate, and CEO tends to take more investment activities. In addition, the external governance environment is closely related to the CEO's risk decision-making. The marketization process and the rule of law level play a significant down-modulatory role to the "U" shaped relationship between CEO excessive power and risk taking, while the degree of government intervention strengthen the relationship between CEO excess power and risk-taking. Further study found that CEO excessive power is negatively related to the corporate value, and external governance environment also have an influence on the relationship. The board of directors shall give CEO optimal power,. When improving the decision-making efficiency of CEO, try to avoid "the entrenchment effect" and "diffiuclt effects". To ensure the sustainable and rapid development of corporates.