FIN-01-026

Fallible Executives, Centralization of Decision-Making and Corporate Performance

September 8, 2001

Renée B. Adams, Heitor Almeida and Daniel Ferreira

ABSTRACT

In this paper we explore some possible consequences of fallibility in managerial decision- making for firm performance. Based on Sah and Stiglitz (1991), we develop the hypothesis that if managers are fallible, firm performance will be more variable as the number of man- agers participating in decision-making decreases, i.e. as the firm becomes more centralized. We use characteristics of the Executive Oce to develop a proxy for the number of executives participating in top decision-making. For example, we argue that if the Chairman of the Board is not the CEO, decision-making in the firm will be more decentralized because the Chairman will also participate in decision-making. We test our hypothesis using this proxy (which we call the centralization index), and find that the evidence is consistent with our hypothesis. Firm performance (measured by Tobin™s Q, stock returns and ROA) is signif- icantly more variable for firms with greater values of our centralization index. The results are consistent across various tests designed to detect dierences in variability.


Renée B. Adams
Institution: Federal Reserve Bank of New York. 33 Liberty Street, New York, NY 10045-0001.
Telephone: (212) 720-5145
Fax: (212) 720-8363
Email: renee.adams@ny.frb.org

Heitor Almeida
Institution: Stern School of Business, New York University, 44th West 4th Street, New York, NY 10012
Telephone: (212) 998-0279
Fax: (212) 995-4233
Email: halmeida@stern.nyu.edu
Homepage:http://www.stern.nyu.edu/~halmeida

Daniel Ferreira
Institution: Department of Economics, The University of Chicago. 1126 East 59th Street, 4th floor, Chicago. IL 60637.
Email: dsferrei@midway.uchicago.edu

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