Abstract:
This paper investigates the impact of excessive managerial entrenchment on the CEO
turnover-performance sensitivity, CEO compensation, and firm value. We measure the
degree of managerial entrenchment based on the E-index presented by Bebchuck et al.
(2006). Our main focus is on firms’ excess managerial entrenchment, which is calculated
by finding the difference between firm’s E-index and its industry median in a given year.
Our findings suggest that an increase in excess CEO entrenchment reduces the likelihood
of CEO turnover due to poor performance. We also show a positive correlation between
excessive entrenchment and CEO compensation as managers gain more power and
authority when they are entrenched. On the other hand, excess CEO entrenchment has an
inverse correlation with firm value. We propose that excessive managerial entrenchment
has a converse impact on board monitoring and firm performance. Also, we suggest that
a sound corporate protects the shareholders’ interests as it prevents CEOs from over
entrenchment.
