Risk Influences of CEO-Dependent Top Managers: Co-Option and the Cost of Equity Capital

Sammanfattning: This thesis aims to explore the research gap in existing literature on top management connectedness toward the CEO, from the perspective of equity stakeholders of the firm. It sheds light on how equity investors perceive firms with executives that are co-opted by the current CEO, in terms of firm risk. The thesis contributes to the existing equity capital markets and corporate governance literature by examining the association between top management team (hereafter, TMT) co-option, defined as the proportion of a firm's top management team that has been appointed during the current CEO's tenure, and the cost of equity capital, estimated on an ex-ante basis. Using data on U.S. firms between 1996-2020, through an OLS regression analysis, we find TMT co-option to be positively associated with the cost of equity capital. The findings support the notion that TMT co-option increases the perceived firm riskiness, resulting in equity investors requiring a higher risk premium. These findings are robust when testing an alternative measure of TMT co-option and controlling for CFO co-option. Furthermore, through a cross-sectional analysis, we distinguish between firms with high vs. low quality of corporate governance and do not find any significant difference in the coefficients for the relation between TMT co-option and the cost of equity capital.