"Bottom-Up Corporate Governance", by HEC Prof. David Thesmar awarded Best Paper by the European Finance Association

11 September 2013

The European Finance Association (EFA) has awarded to Prof. David Thesmar, HEC Paris Professor, the prize for the “Best Paper published in the Review of Finance"  in 2013, for his article “Bottom-Up Corporate Governance”. The Review of Finance  is the leading european finance journal. The award ceremony took place during the 40th EFA Annual Conference, at Cambridge Judge Business School on 28-31 August, 2013.

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The paper shows that independence of top executives from the CEO has an impact on corporate performance. An extensive body of research in corporate governance has failed to find a statistical link between firm performance and the independence of non executive directors. This goes against the general opinion that firms need independent directors to be well-managed. With his co-authors, Augustin Landier and Julien Sauvagnat from Toulouse School of Economics, and David Sraer from Princeton University, David Thesmar shifts the focus from the board room to the executive suite. They measure executive independence by looking at whether an executive was appointed during or before the current CEO’s tenure. Their rationale is that independently minded executives impose more constraints on the CEO than executives who owe him their jobs. These constraints may prevent inefficient decisions from being taken, and have in general the useful effect of de-biasing the CEO’s strategic choices. Consistent with this hypothesis, they find a strong statistical relationship between firm performance (profitability, stock returns) and executive independence. 

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