The Effect of Institutional Ownership on the Chief Executive Officer Tenure-Firm Risk Relationship

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Duangnapa Sukhahuta

Abstract

The primary objective of this study is to examine the relationship between chief executive officer (CEO) tenure and firm risk. The second objective is to examine the effect of institutional ownership on the relationship between CEO tenure and firm risk. The data were 313 firms which were collected from the stock exchange of Thailand. The result of the study showed that CEO tenure had a significantly negative association with firm risk at a level 0.01. When CEOs have long tenure in a firm, they gain more power. They make a decision to invest in a project that is not too risky because it will affect their position, even though that project can make shareholder maximization. This result is consistent with the Agency theory.


This study was also testing the Sub-group analysis and divided the samples into two groups according to high and low institutional ownership. The result showed that the relationship between CEO tenure and firm risk of each group was still negative. To test the moderation effect, this study used institutional ownership as a moderator, and used the interaction term between CEO tenure and institutional ownership to test in a model. The result showed that the interaction term between CEO tenure and institutional ownership was positively significant to firm risk at a level 0.05. The influence of the institutional ownership creates a reversible relationship between CEO tenure and firm risk. It showed that the institutional ownership acted as a moderator which created a good corporate governance for the organization.

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References

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