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Does CEO Duality Really affect Corporate Performance?

Article  in  Corporate Governance An International Review · February 2007

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DOES CEO DUALITY REALLY AFFECT CORPORATE PERFORMANCE? 1203

Does CEO Duality Really Affect

Corporate Performance?
Khaled Elsayed*

Most research investigating the impact of board leadership structure as a corporate governance
mechanism, on corporate performance has focused largely on either the Anglo-American
context or the Asian experience and has come up with diverse conclusions. This study sheds
light on the extent to which corporate leadership structure affects corporate performance by
providing empirical evidence from a sample of Egyptian listed firms. The initial econometric
results indicate that CEO duality has no impact on corporate performance. However, when an
interaction term between industry type and CEO duality is included in the model, the impact
of CEO duality on corporate performance is found to vary across industries, a result that is
supportive of both agency theory and stewardship theory. In addition, when firms are categor-
ised according to their financial performance, CEO duality attracts a positive and significant
coefficient only when corporate performance is low.

Keywords: Agency theory, board size, CEO duality, corporate governance, corporate perfor-
mance, institutional ownership, managerial shareholding, stewardship theory

1. Introduction rate governance, both corporate performance

and the investor’s money may be at risk” (p.

O ne of the main aspects that characterises

modern corporations, noticed formerly
by Berle and Means (1932), is the separation of
ownership from management. In their seminal
paper, Jensen and Meckling (1976) modelled
this situation as an agency relationship and
defined it as “a contract under which one or
more persons (the principal(s)) engage another
person (the agent) to perform some service on
their behalf which involves delegating some
decision making authority to the agent” (p.
308). They argued that the agent will always
seek to maximise his wealth at the expense of
the shareholders’ value. Therefore, the princi-
pal needs to incur specific costs to monitor the
agent’s decisions so as to ensure that conflict in
interests between both sides are minimised.
As a result, corporate governance mecha-
nisms are considered in the literature to be
essential instruments to align the objective
function of the management and shareholders.
For instance, Mallin (2001) expressed the
growing importance of these instruments as
follows, “In conclusion, without good corpo-
78). In fact, one of the reasons that corporate
governance has increased in significance is
the well-documented recent changes in the
pattern of share ownership of firms, in particu-
lar the growth of institutional ownership
(Mallin, 1999). A second important factor has
been the growing number of financial and
accounting scandals that have occurred in
several modern corporations (e.g. BCCI, Polly
Peck, Maxwell Communications, World.com
and Enron).
In the Egyptian context, corporate gover-
nance has been seen as an increasingly impor-
tant topic. Abdel Shahid (2001) summarised
the reasons for this as follows “the integration
of the Egyptian economy with the global
economy; internationalization of capital mar- *Address for correspondence:
kets; the increasingly important role played Business Administration
by the [p]rivate sector in the economy” Department, Faculty of Com-
merce, Ain Shams University,
(p. 41). Examples of recent developments of Main Campus (Western Divi-
corporate governance in Egypt include the sion), Abbassia 11566, Cairo,
execution of a joint project between the World Egypt. Tel: (++202) 610 3469;
Fax: (++202) 610 3560; E-mail:
Bank and the Ministry of Foreign Trade in 2001 Khaled.Elsayed@commerce.
to benchmark corporate governance practices shams.edu.eg

© 2007 The Author

Journal compilation © 2007 Blackwell Publishing Ltd, 9600 Garsington Road,
Oxford, OX4 2DQ, UK and 350 Main St, Malden, MA, 02148, USA Volume 15 Number 6 November 2007
1204
in Egypt against the corporate governance
principles of the Organization of Economic
Co-operation and Development (OECD) (i.e.
the rights of the shareholders, equitable treat-
ment of shareholders, the role of stakeholders
in corporate governance, timely and accurate
disclosure and transparency, and the respon-
sibilities of the board). Following this, the
Egyptian Institute of Directors was established
in 2004 to create proper awareness among
Egyptian corporations and emphasise upon
the roles and functions of the directors in
achieving corporate activities and attaining
corporate goals. Moreover, in 2005, the
Egyptian Institute of Directors launched a
code, guidelines and standards of corporate
governance to be followed by Egyptian corpo-
rations.
Even legislation that regulates the Egyptian
capital market has recently been reformed par-
tially to reflect corporate governance prin-
ciples. For instance, following the issuing of
new listing rules for Cairo and Alexandria in
July 2002, the number of listed companies
decreased from 1200 firms worth $13 billion in
2000 to 766 firms worth $52 billion in 2005
(International Chamber of Commerce, 2006).
A key controversy in the corporate gover-
nance literature is the impact of CEO duality
(used as a proxy for board leadership struc-
ture) on corporate performance. CEO duality
refers to the position where the executive
manager serves also as the chairman of the
board of directors. Studying the relationship
between CEO duality and corporate perfor-
mance is an important issue for several differ-
ent reasons. First, previous theoretical and
empirical work (see for example, Berg and
Smith, 1978; Chaganti et al., 1985; Donaldson
and Davis, 1991; Rechner and Dalton, 1991;
Boyd, 1995; Abdullah, 2004; Lin, 2005) draws
quite diverse conclusions regarding the impact
of duality on performance. Second, CEO
duality “has been blamed for poor perfor-
mance and slow response to change in firms
such as General Motors” (Boyd, 1995, p. 301).
A final motivating factor for the approach
taken in this paper is the fact that, although
CEO duality is the common leadership struc-
ture among Egyptian firms, there is very little
empirical evidence regarding its impact on
corporate performance in Egypt.
Thus, the aim of this paper is to provide
robust evidence regarding the relationship
between CEO duality and corporate perfor-
mance using rigorous econometric methods of
analysis. Particular features of this analysis are
the use of alternative measures of corporate
performance and the introduction of controls
for other corporate governance mechanisms,
alongside other related co-variates.
Volume 15 Number 6 November 2007
CORPORATE GOVERNANCE
2. Literature review
Separation of ownership and management in
modern corporations has led to different argu-
ments regarding the relationship between the
principal and the agent. According to agency
theory, the agent, in this relationship, will be a
self-interest optimiser. In other words, execu-
tive managers will take decisions with the aim
of optimising their wealth and/or minimising
their risk at the expense of the shareholders’
value. Therefore, it has been argued that inter-
nal and external monitoring mechanisms need
to be implemented to lessen divergence in
interests between shareholders and the man-
agement (Jensen and Meckling, 1976; Fama
and Jensen, 1983).
However, some other researchers argue
against the hypothesis of agency theory and
propose stewardship theory. For example,
Donaldson and Davis (1991) claim that, “The
executive manager, under this theory, far from
being an opportunistic shirker, essentially
wants to do a good job, to be a good steward
of the corporate assets” (p. 51). The explicit
premise of stewardship theory is that the
structure of the firm is the main determinant
that can assist (or otherwise) the executive
manager to implement his or her plans and
objectives effectively.
As a result, various mechanisms have been
proposed and explored in the literature to
achieve the monitoring task. In this paper, one
key mechanism analysed, namely board lead-
ership structure. According to Johnson et al.
(1996) the board of directors has three major
responsibilities to accomplish: monitoring
management actions, advising the CEO and
getting external resources that are vital to
build corporate capabilities. One fundamental
question that has received growing attention
in the literature is whether there is a relation-
ship between board leadership structure and
corporate performance. Put another way, is it
better to have one person to fulfil the CEO
position and at the same time to be the chair-
man of the board of directors (CEO duality), or
is it preferable to give the two jobs to different
people?
Different theoretical arguments have been
used either to support or to challenge CEO
duality. Drawing on agency theory, the oppo-
nents (e.g. Levy, 1981; Dayton, 1984) suggest
that CEO duality diminishes the monitoring
role of the board of directors over the execu-
tive manager, and this in turn may have a
negative effect on corporate performance. In
other words, as Alchian and Demsetz (1972)
state, “who monitors the monitor?” (p. 782).
On the other hand, advocates of CEO duality
(e.g. Anderson and Anthony, 1986; Donaldson
© 2007 The Author
Journal compilation © Blackwell Publishing Ltd. 2007
DOES CEO DUALITY REALLY AFFECT CORPORATE PERFORMANCE?
and Davis, 1991; Davis et al., 1997) assert that
corporate performance can be enhanced, when
executive manager has the full authority over
his corporation by serving also as the chair-
man, as less conflict is likely to happen. Other
authors such as Brickley et al. (1997) argue that
there is no one optimal leadership structure as
both duality and separation perspectives have
related costs and benefits. Hence, duality will
benefit some firms while separation is likely to
be advantageous for others.
Empirical evidence is somewhat inconclu-
sive. While some studies (e.g. Donaldson and
Davis, 1991; Lin, 2005) support the positive
impact of CEO duality on corporate perfor-
mance, others (e.g. Rechner and Dalton, 1991;
Pi and Timme, 1993) find that duality leads to
inferior shareholder value. Yet other studies
(e.g. Berg and Smith, 1978; Chaganti et al.,
1985; Rechner and Dalton, 1989; Baliga et al.,
1996; Abdullah, 2004) find that CEO duality
and corporate performance are not correlated.
To tackle this problem in the literature, some
authors use contingency theory to explain the
relationship between CEO duality and corpo-
rate performance. For instance, Boyd (1995)
clarifies that “We propose that both theoretical
perspectives are correct – under different cir-
cumstances. Thus, duality may be negatively
associated with performance in some situa-
tions, but be positively related in others” (p.
302). In a similar vein, Brickley et al. (1997)
illustrate that the optimal leadership structure
varies across firms. Furthermore, Rhoades et al.
(2001), in their meta-analysis study, find that
independence of the CEO and the chairman of
board has a positive impact on corporate per-
formance, but this varies with the context of
the study.
Many of previous studies can be challenged
on their methodological premise. First, some
of these studies reveal different competed
conclusions and generalisations without con-
trolling for significant variables that may
confound the relationship between CEO
duality and corporate performance (see, for
example, Rechner and Dalton, 1991). Second,
although it is known that alternative mecha-
nisms of corporate governance can interact
to determine corporate performance (see, for
example, Chaganti and Damanpour, 1991;
Barnhart and Rosenstein, 1998), several
researchers (e.g. Donaldson and Davis, 1991)
make no attempt to control for other mecha-
nisms of corporate governance.
Third, the bulk of prior research (e.g.
Chaganti et al., 1985; Pi and Timme, 1993),
investigates the relationship between CEO
duality and corporate performance using a
single industry context or else does not control
for industry effects. A consequence is that “the
© 2007 The Author
Journal compilation © Blackwell Publishing Ltd. 2007
1205
extent of any confounding of structure effects
by industry effects is unknown” (Donaldson
and Davis, 1991, p. 53). Finally, some studies
(e.g. Donaldson and Davis, 1991; Rechner and
Dalton, 1991; Abdullah, 2004) rely on univari-
ate analysis techniques, and do not consider
any confounding factors.
Although there has been progress in corpo-
rate governance practices in Egypt, it is clear
that significantly more attention needs to be
paid to the supervision of the board of direc-
tors (Fawzy, 2003). For instance, Abdel Shahid
(2001) suggests that “There are no rules gov-
erning the composition between executive and
non-executive directors and the concept of
independent directors is not well established
among listed companies. In most listed com-
panies, there is no separation between the roles
of the chairman and managing director roles.
The same person may hold both posts” (p. 55).
In a similar vein, the result of the MENA
(2003) survey confirms that many companies
are held by family groups or individuals and
this makes it difficult for managers to practice
independence, flexibility and objectivity. This,
in fact, leads to a system in which the rights of
minority shareholders are often neglected. The
survey also shows that most shares are con-
trolled by strategic investors and implement-
ing an effective corporate governance system
at firm level is still too costly to be considered
by Egyptian companies, many of them being
small or medium size enterprises.
The contradictory evidence from both
theory and empiricism combined with the lack
of any evidence from Egyptian context pro-
vides the motivation for the following null
hypothesis:
H0: CEO duality has no impact on corporate
performance
Although the main research question in this
study is designed to explore the effect of CEO
duality on corporate performance, possible
endogeneity between corporate performance
and CEO duality is an important issue that
needs to be addressed in a study such as this.
Hermalin and Weisbach (2003) argue that very
little empirical work on corporate governance
has considered the issue of endogeneity
between firm performance and board charac-
teristics. It is important to note that their con-
clusion was based purely on a review of the
economic literature and relevant managerial
studies were omitted (see their work, p. 8).
However, in the spirit of their argument, esti-
mating either board leadership structure or
corporate performance individually, in the
presence of endogeneity effect would lead to
biased and inconsistent estimates as a result
of the expected correlation between the error
Volume 15 Number 6 November 2007
1206
term and the endogenous variable. Accord-
ingly, in the empirical work below, some time
is spent considering tests for endogeneity.
3. Sample design and measurement
of variables
The sample used in this study was derived
from Egyptian public limited firms. The
main source of the data is the records of the
Egyptian Capital Market Agency (ECMA) over
the time period 2000 to 2004. Firms are taken
from the list of most active companies that con-
stitute the market index published by the
ECMA. The period 2000 to 2004 is particularly
relevant as only since 2000 has there been a
growing realisation of the importance of cor-
porate governance in achieving economic
reform (Abdel Shahid, 2001; Fawzy, 2003).
Complete data on board leadership structure,
corporate performance and other related vari-
ables were available for 92 firms cover 19 dif-
ferent industrial sectors.
The dependent variable in this study is cor-
porate performance. Researchers in corporate
governance literature have used two alterna-
tive approaches to measuring corporate per-
formance. The first group (see, for example,
Muth and Donaldson, 1998; Erhardt et al.,
2003) have used accounting measures of cor-
porate performance, while the second group
(see, for example, Barnhart and Rosenstein,
1998; Evans et al., 2002; Kiel and Nicholson,
2003) have applied market valuation measures,
especially the Tobin’s q ratio. The accounting
measures have included return on assets,
return on equity and return on investment.
The current study uses return on assets on
the basis that it mainly reflects operating re-
sults rather than capital structure decisions.
For example, Schmalensee (1989) argues that
“Increases in leverage make the residual
return to equity more variable, and in competi-
tive capital markets investors must generally
be paid higher average returns to compensate.
Return on assets, on the other hand, will
mainly reflect operating results, not capital
structure decisions” (p. 960).
Various arguments have been presented in
the literature to support the use of the Tobin’s
q ratio as an appropriate measure for corporate
performance. For instance, Tobin’s q ratio is a
long-term measure that takes risk and return
dimensions into account (Manuel et al., 1996)
and reflects the firm’s ability to improve per-
formance over time (Caton et al., 2001). Simi-
larly, Salinger (1984) argue that Tobin’s q ratio
is better than single period measures of profits,
as it recognises the present value of the future
profits.
Volume 15 Number 6 November 2007
CORPORATE GOVERNANCE
In contrast, Martin (1993) based on the
results of McFarland (1988) and Shepherd
(1986), suggests that Tobin’s q and accounting
measures “should be regarded as comple-
ments rather than substitutes. Both contain
information about market power, and there is
no compelling reason to think that either type
of measure dominates the other” (Martin,
1993, p. 516). For this reason, two alternative
measures of corporate performance are used
in the empirical work below: return on assets
and Tobin’s q ratio.
Return on assets is an accounting-based
measure measured by net profit divided by
total assets. Regarding Tobin’s q ratio, Tobin
(1978) showed the significant role of the q ratio
as a measure of profitable investments. Shortly
afterwards, Lindenberg and Ross (1981)
defined Tobin’s q as the ratio of the firm
market value to the replacement cost of its
assets. Thus, in an equilibrium situation the q
ratio should have the value of one. Alterna-
tively, if the q ratio is more than one, then this
denotes more expected investment opportu-
nities. Otherwise, less profitable investment
opportunities are expected if the q ratio is less
than one (Kim et al., 1993).
However, Chung and Pruitt (1994) argue in
favor of a simplified approximation to Tobin’s
q to avoid complicated calculations required to
compute replacement cost. They conclude that
“Results of a series of regressions comparing
our approximate q values with those obtained
via Lindenberg and Ross’ (1981) more theo-
retically correct model indicate that at least
96.6 per cent of the variability of Tobin’s q is
explained by approximate q” (Chung and
Pruitt, 1994, p. 70). Hence, this study uses the
Chung and Pruitt approximation of Tobin’s q.
Specifically, this is measured as follows:
Tobin’s q ratio = [Market Value + Book value
of Preference Capital + Book value of Long-
term Debt + Book value of Inventory + Book
value of Current Liabilities – Book value of
Current Assets] / [Total Assets] (see Lee and
Tompkins, 1999).
The main independent variable in this study
is board leadership structure. A binary variable
is used as a proxy for CEO duality. This binary
variable takes the value of one if the CEO also
served as board chairman and zero otherwise.
This categorisation suggests that for 79 per cent
of firms in the sample, the same person holds
the title of CEO and chairperson. This figure is
close to that reported in previous work. For
example, the corresponding figure reported by
Rechner and Dalton (1991) is 78.7 per cent,
Donaldson and Davis (1991) find duality in 76
per cent of firms in this situation, whilst
© 2007 The Author
Journal compilation © Blackwell Publishing Ltd. 2007
DOES CEO DUALITY REALLY AFFECT CORPORATE PERFORMANCE?
Table 1: Descriptive statistics
Variables
Return on Assets (%)
Tobin’s q Ratio
CEO Duality
Board Size
Institutional Ownership (%)
Management Shareholding (%)
Firm Size
Debt
Capital Intensity
Brickley et al. (1997) report a figure of 80.94
per cent.
A range of control variables that reflect
monitoring and corporate governance mecha-
nisms are included in order to ensure that the
estimated models have no specification errors.
These variables are board size, institutional
ownership and management shareholding.
Several previous studies (e.g. Yermack,
1996; Barnhart and Rosenstein, 1998) have
identified board size as a significant predictor
of firm performance. Here, the total number of
directors on the board is used to measure
board size. Furthermore, drawing on the argu-
ment that institutional investors have an
impact on corporate power (Salancik and
Pfeffer, 1980) and, thus, corporate perfor-
mance (Chaganti and Damanpour, 1991), insti-
tutional ownership is measured by the
proportion of shares owned by institutional
investors divided by total number of shares.
Managerial shareholding may also be impor-
tant as ownership by managers may be a
mechanism that aligns the divergence in inter-
ests with shareholders (Jensen and Meckling,
1976) and hence impacts on corporate perfor-
mance (Barnhart and Rosenstein, 1998). Here,
managerial shareholding is measured by the
ratio between shares held by management and
total number of shares.
In addition, following both the financial
and corporate governance literature (see, for
example, Capon et al., 1990; Baliga et al., 1996),
other control variables that may confound the
relationship between CEO duality and corpo-
rate performance are considered. Explicitly,
those variables are corporate size, debt ratio
and capital intensity. Corporate size is meas-
ured by the total number of employees
(Donaldson and Davis, 1991). Given that the
Shapiro-Wilk W test for normality and the
Skewness and kurtosis test for normality
(Tabachnick and Fidell, 2001) are significant
(Shapiro-Wilk W = 4.184, p < 0.001 and Skew-
© 2007 The Author
Journal compilation © Blackwell Publishing Ltd. 2007
1207
Observations Mean Stand Deviation
361 4.73 12.49
361 0.745 0.773
368 0.782 0.413
364 8 3
368 35.59 31.81
368 11.46 23.84
368 7.07 1.3
361 0.637 0.408
361 0.431 0.269
ness and Kurtosis test = 7.52, p < 0.05), the
natural logarithm is used to transform corpo-
rate size. The debt ratio is expressed as the
ratio of total debt to total assets (Baliga et al.,
1996). Capital intensity is measured by the
ratio of net fixed assets to total assets (Elsayed
and Paton, 2005).
Much of the previous work (see, for
example, Chaganti et al., 1985; Rechner and
Dalton, 1991; Abdullah, 2004) neglected to
control adequately for possible confounding
variables. Controlling for industry effects is of
particular importance for several reasons.
First, firms are found to respond differently
to given external pressures (Bhambri and
Sonnenfeld, 1988). Therefore controlling for
industry effect can help identify unobserved
heterogeneity at the industry level (Klapper
and Love, 2004), such as product and market
competition (Donaldson and Davis, 1991).
Second, corporate ethical behavior may have a
differential impact on financial performance
across industries (Elsayed and Paton, 2005).
Third, some previous studies (e.g. Boyd, 1995;
Brickley et al., 1997) have documented that the
relationship between CEO duality and corpo-
rate performance varies among industries. In
this study, industry effects are controlled for
by the inclusion of dummy variables using
two-digit standard industrial classification
code.
Finally, as corporate performance may have
altered significantly over the time of the study
period, a time trend is included in each model.
Table 1 reports some descriptive statistics
for all of the preceding variables discussed
above.
4. Empirical analysis and findings
In view of the above discussion, the following
regression equation was used to test the main
hypothesis in this study.
Volume 15 Number 6 November 2007
1208
yit = α i + β1CEOit + β2 BORit + β3 INSit + β4 MAN it
+ β5 SIZit + β6 DEBit + β7 CAPit + β8TRNit + ε it
where, the subscript, i, refers to the firm
number and the subscript, t, denotes the time
period; the dependent variable (yit) is corpo-
rate performance for firm i in time t; ai is a
constant; b1 - b8 are the parameters for the
explanatory variables; CEO refers to CEO
duality; BOR denotes board size; INS refers to
institutional ownership ratio; MAN is the
managerial ownership ratio; SIZ refers to firm
size; DEB is the debt ratio; CAP represents
capital intensity; TRN is the time trend, and (e)
is the error term.
The F-test (Baltagi, 1995) and Breusch and
Pagan (1980)’s Lagrange Multiplier test are
used to decide between pooled regression and
the alternatives of fixed and random effects,
respectively. In both cases, the null hypothesis
could not be rejected at the 5 per cent signifi-
cance level and, hence, I use a pooled regres-
sion approach.
To test for the importance of control vari-
able as explained above, two unrestricted
models have been setup in which CEO
duality is included as potential an explana-
tory variable for either ROA or Tobin’s q.
Board size, institutional ownership and man-
agement shareholding are included amongst
the set of control variables. Following this, a
restricted model nested within each model is
considered excluding board size, institutional
ownership and management shareholding.
The Akaike Information Criterion (AIC) is
computed to evaluate the two models (Guja-
rati, 2003). The AIC for ROA unrestricted
model was 2801.586, while it was 2805.646
for the restricted model. On the other hand,
the AIC for Tobin’s q unrestricted model
was 645.0748 compared to 659.0689 for the
restricted model. A lower value of the AIC
implies a better specified model (Greene,
Table 2: Results of testing the OLS assumptions
Tests for OLS Assumptions
Variance Inflation Factor (VIF)
Cook-Weisberg Test
Shapiro-Wilk W Test
Interquartile Range (IQR)Test
Observations
Notes: N = 92; *p < 0.05; **p < 0.001. VIF tests multicollinearity between the explanatory variables. VIF in
excess of 10 provides evidence of possible multicollinearity (Gujarati, 2003). Cook-Weisberg tests heterosce-
dasticity using fitted values of the dependent variable (Greene, 2003). Shapiro-Wilk W tests normality of the
residuals (Gujarati, 2003). Interquartile Range test for severe outliers. Finding severe outlier is sufficient
evidence to reject normality at 5% significant level (Hamilton, 2003).
Volume 15 Number 6 November 2007
CORPORATE GOVERNANCE
2003) and, hence, the results suggest that the
unrestricted models (including board size,
institutional ownership and management
shareholding) are superior to the restricted
models. The implication of this is that those
three control variables cannot be safely
dropped from the model.
As explained before, one significant issue in
estimating the impact of CEO duality on cor-
porate performance, is possible endogeneity
between both sides. Gujarati (2003) indicated
that the Hausman specification test can be
used to test for endogeneity. Under the null
hypothesis of the Hausman test, there is no
endogeneity and the Ordinary Least Square
(OLS) estimates are consistent. Following this
approach, the reduced-form equations for
CEO duality and board size are estimated.
In these, each equation includes only the pre-
determined variables. Following this, the
predicted values for CEO duality and board
size are computed. Then, the corporate perfor-
mance model is estimated using the two alter-
native dependent variables (ROA and Tobin’s
q) with the predicted values being included on
the right hand side. An F-test is used to test the
null hypothesis that the coefficients of the pre-
dicted values of CEO duality and board size
equal zero. The F-test for either ROA model
(2.05, p > 0.10) or Tobin’s q model (1.09,
p > 0.10) does not provide any evidence of
endogeneity, and thus the null hypothesis
cannot be rejected. This result provides some
reassurance regarding the possible endogene-
ity between corporate performance and board
characteristics.
To test the main hypothesis in this study, the
starting point was to estimate OLS regression
of both return on assets and Tobin’s q. Speci-
fication tests of the OLS assumptions (reported
in Table 2) confirm that homoscedasticity and
normality of residuals, as two main assump-
tions of the OLS are both violated. Using the
ROA Model Tobin’s q Model
<10 <10
396.49** 589.41**
0.6378** 0.5332**
YES* YES*
357 357
© 2007 The Author
Journal compilation © Blackwell Publishing Ltd. 2007
DOES CEO DUALITY REALLY AFFECT CORPORATE PERFORMANCE? 1209

Table 3: LAV regression estimates of the impact of CEO duality on corporate performance

Dependent Variable: Return on Assets Tobin’s q ratio

Corporate Performance (ROA) Model (Q) Model

Constant 0.8069 -0.2654***

(2.359) (0.679)
CEO Duality 0.9483 0.0154
(0.6806) (0.0192)
Board Size 0.0624 0.0048
(0.1064) (0.0030)
Institutional Ownership 0.0467*** 0.0008**
(0.0101) (0.0002)
Management Shareholding 0.0334** 0.0011**
(0.0125) (0.0003)
Firm size 1.536*** 0.0427***
(0.2608) (0.0074)
Debt -3.229*** 0.4264***
(0.6116) (0.0181)
Capital Intensity -7.252*** 0.6142***
(1.314) (0.0377)
Trend -0.286 0.0014*
(0.0285) (0.0010)
Industry Effect (2-digit SIC) YES*** YES***
Pseudo R2 0.21 0.39
Observations 357 357

Figures in parentheses are standard errors. *p < 0.10; **p < 0.010; ***p < 0.001.

interquartile range test (Hamilton, 2003) sug-
gests that this can be traced back to the pres-
ence of severe outliers.
Dielman and Rose (1997) suggest that “esti-
mating regression models using ordinary least
squares (OLS) yields parameter estimates that
are unbiased and have minimum variance
when the disturbances are independent and
identically normally distributed. In the pres-
ence of non-normal errors, however, the per-
formance of OLS can be quite impaired,
especially if the errors follow a distribution
that tends to produce outliers” (p. 239). Alter-
natives that are available to correct for non-
normality of residuals include transforming
variables to achieve normal distributions, or
using discriminant analysis (Tabachnick and
Fidell, 2001). However, the Least Absolute
Value (LAV) regression, which also is known
as the median regression model “has recently
gained acceptance as an alternative to ordinary
least squares (OLS) estimation when outliers
may be present. LAV estimates are not as
strongly affected as OLS estimates by the pres-
ence of extreme observations” (Dielman and
Rose, 1995, p. 199).
In LAV regression, the median of the de-
pendent variable is estimated by getting the
raw sum of absolute deviations around the
unconditional median to find the regression
coefficients that minimise the regression func-
tion (Rousseeuw and Leroy, 2003). Accord-
ingly, LAV regression model selects the
estimates of parameters “that minimize the
sum of the absolute residuals. The use of this
criterion, rather than the minimization of the
sum of the squared residuals used in OLS esti-
mation, provides robustness against outliers”
(Dielman and Rose, 1997, p. 241).
Table 3 presents the estimates of LAV
regression for return on assets and Tobin’s q
using CEO duality as main independent vari-
able and controlling for other variables as
explained above. Econometric analysis using
return on assets as a proxy for corporate per-
formance indicates that CEO duality has no
significant impact on ROA. In a similar vein,
the results did not alter when Tobin’s q ratio is
used as a dependent variable.
With respect to control variables, empirical
analysis for both models document that, while
institutional ownership and managerial share-
holding are estimated to have a positive and
significant impact on corporate performance,
board size is never significant. Other control
variables (firm size, capital intensity, debt ratio

© 2007 The Author Volume 15 Number 6 November 2007

Journal compilation © Blackwell Publishing Ltd. 2007
1210
and industry effect) are significant (p < 0.001)
in both models. Finally, the time trend is sig-
nificant only in Tobin’s q model (p < 0.10).
Overall, these results do not allow the
researcher to reject the null hypothesis that
CEO duality has no impact on corporate
performance.
One possible reason for this finding is the
combination of different industries in the
analysis. For example, it may be that positive
impacts in some industries offset negative
effect in others. Indeed, some previous work
(see for example, Boyd, 1995; Brickley et al.,
1997; Rhoades et al., 2001) has argued that the
impact of CEO duality on corporate perfor-
mance is dependent on both the industry and
the study’s context.
To explore this issue further, interaction
terms between industry dummy variables and
CEO duality are included in the above models.
In every case, F-test of the joint significance of
the interaction terms is conducted. For the
return on assets model, the joint test was not
significant, suggesting no industry differences
in the impact of CEO duality on corporate per-
formance. However, for the Tobin’s q model,
the joint test is strongly significant (F-test 4.95,
p < 0.001). Therefore, in Table 4 estimates of
the CEO duality for each industry are reported
for the Tobin’s q model. The same control vari-
ables as before continue to be included in the
model.
The results reported in Table 4 suggest that
CEO duality is positively correlated with cor-
porate performance in five industries: Textiles
& Clothing, Paper, Packaging & Plastic, Gas,
Oil & Mining, Food & Beverage and Housing
& Real Estate. On the other hand, CEO duality
is negatively associated with corporate perfor-
mance in just one industry, Cement, and has a
neutral effect in the context of other industries.
One possible explanation for this negative
impact in the cement industry in Egypt is that
this sector has been recently privatised and
dominated by foreign ownership.
Another related issue that needs to be exam-
ined in the light of the results of the current
study is the argument of Finkelstein and
D’Aveni (1994). They asserted that board of
directors is less likely to approve CEO duality
when corporate performance is high and visa-
versa. This implies that the relationship
between CEO duality and corporate perfor-
mance may vary with corporate performance
itself.
To explore this argument, the sample has
been classified into three sub-groups accord-
ing to their corporate performance (measured
alternatively by return on assets and Tobin’s
q). These three groups are measured by a cat-
egorical variable and are termed high group,
Volume 15 Number 6 November 2007
CORPORATE GOVERNANCE
middle group and low group. The impact
of CEO duality on corporate performance for
the high and low performance sub-groups is
estimated using the LAV regression and the
results are reported in Table 5. The results
suggest that CEO duality had a significantly
positive impact on performance in the low per-
formance sub-group using either return on
assets (1.512, p < 0.001) or Tobin’s q (0.0169,
p < 0.001). In contrast, CEO duality does not
appear to have any significant impact on high
performance sub-groups.
5. Conclusion and discussion
The aim of this study was to explore to what
extent CEO duality, as a proxy for board lead-
ership structure, can affect corporate perfor-
mance. A key motivating factor for this work
was that prior research on this point has
arrived at inconclusive and contradictory con-
clusions. Although the findings reveal that
board leadership structure has no direct
impact on corporate performance, additional
analysis demonstrates that the impact of CEO
duality varies with industry type and firm
performance.
The finding that the impact of CEO duality
on corporate performance varies with indus-
try context and corporate performance itself
provides partial support for agency theory
and stewardship theory. Thus, the results in
this paper are consistent with the conclusions
of Boyd (1995) and Brickley et al. (1997) who
have argued that there is no one optimal
board leadership structure and that CEO
duality will benefit some firms while separa-
tion will be more advantageous for others.
The findings also provide support for the
conclusion of Finkelstein and D’Aveni (1994)
that, when corporate performance is low, the
board of directors is more likely to prefer
CEO duality as a means of improving corpo-
rate performance.
Drawing upon these findings, the author’s
belief is that the relationship between CEO
duality and corporate performance should not
be viewed as monotonic. Rather it should be
considered as a dynamic relationship that may
vary with corporate characteristics and/or
industry context. This understanding may help
to illustrate why the meta-analysis of Rhoades
et al. (2001) concludes that the positive associa-
tion between separation and corporate perfor-
mance varies depending on the context of the
study.
These results have at least two key implica-
tions for managerial practice. First, they do not
confirm previous suggestions in the literature
that CEO duality is to blame for poor corporate
© 2007 The Author
Journal compilation © Blackwell Publishing Ltd. 2007
DOES CEO DUALITY REALLY AFFECT CORPORATE PERFORMANCE? 1211

Table 4: Coefficient of interaction between industry effect and CEO duality on corporate performance
(measured by Tobin’s q)

Industry Tobin’s q N of Firms

Industries with significantly positive coefficients

Textiles & Clothing 0.1589** 6
(0.0731)
Paper, Packaging & Plastics 0.1823** 3
(0.0736)
Electrical Equipment & Engineering 0.2005** 3
(0.0813)
Gas, Oil & Mining 0.168** 1
(0.0934)
Food & Beverage 0.1558** 8
(0.0785)
Housing & Real Estate 0.1496** 8
(0.0654)
Industries with significantly negative coefficients
Cement -0.1089* 9
(0.0645)
Industries with insignificant coefficients
Agriculture & Fisheries -0.0837 2
(0.0651)
Mills & Storage 0.1197 7
(0.0738)
Chemicals & Fertilizers 0.0831 8
(0.0689)
Pharmaceuticals & Health Care 0.0716 10
(0.0687)
Steel -0.0506 5
(0.0692)
Construction 0.0133 11
(0.0665)
Communication 0.0434 4
(0.0545)
Consumer & Household Goods 0.1056 1
(0.0896)
Tourism & Entertainment -0.0172 1
(0.0852)
Utilities & Other Services 0.0433 1
(0.0822)
IT & Media 0.0473 2
(0.0823)
Trade & Retailers 0.0951 2
(0.0766)

Figures in brackets are standard errors. *p < 0.10; **p < 0.05.

performance. Second, they indicate that there
is no one optimal leadership structure. Both
duality and separation approaches have asso-
ciated costs and benefits. Duality will benefit
some firms while separation could be more
worthy for other firms. Hence, as they com-
mence their exploration of corporate gover-
nance issues, Egyptian firms need to recognise
that the structure of the firm and industrial
activity are the main determinants that can

© 2007 The Author Volume 15 Number 6 November 2007

Journal compilation © Blackwell Publishing Ltd. 2007
1212
Table 5: LAV regression estimates of the impact of CEO duality on corporate performance in low and high
performance sub-groups
Dependent Variable: Return on Assets (ROA) Model
Corporate Performance
Low Group
CEO Duality 1.512*
(0.0008)
Pseudo R2 0.267
Observations 90
All control variables are included in all models as explained in the text. Figures in parentheses are standard
errors. *p < 0.001.
boost the impact of board leadership structure
on corporate performance.
Furthermore, although different mecha-
nisms have been proposed in the literature to
align the objective function of the manage-
ment and shareholders, the findings here
suggest that for Egyptian firms the most effec-
tive instruments are institutional ownership
and managerial shareholding. This confirms
the results of Abdel Shahid (2003), who found
a correlation between ownership characteris-
tics and the corporate performance of Egyp-
tian firms. Thus, one key recommendation for
the Egyptian corporations and government is
to utilise the positive effect of ownership
structure in exploiting corporate governance.
The findings of this study open new direc-
tions for future research. First, the finding that
the relationship between CEO and corporate
performance varies with corporate characteris-
tics suggests there is great potential for future
studies to investigate the relationship between
firm life cycle and CEO duality. The key
premise of firm life cycle theory is that organi-
sational characteristics, variables and priorities
vary with firm life cycle stage (Quinn and
Cameron, 1983; Miller and Friesen, 1984).
Thus, one important question that needs to be
answered by future research is in which life
cycle stage is CEO duality most beneficial and
in which stage should separation be recog-
nised as a likely optimal alternative. Another
related and significant question is whether
CEO duality affects corporate performance
differently depending on the life cycle stage of
the firm.
Second suggestion for future work stems
from the suggestion that leadership structure,
as well as corporate governance, may have a
pronounced impact on measures of reputation
and social responsibility. The recent docu-
mented change in the pattern of share owner-
ship (particularly in institutional ownership)
Volume 15 Number 6 November 2007
CORPORATE GOVERNANCE
Tobin’s q ratio (Q) Model
High Group Low Group High Group
0.982 0.0169* 0.0173
(3.189) (0.0033) (0.0384)
0.17 0.51 0.259
180 90 177
of firms (Mallin, 1999) and the growing im-
portance of corporate environmental-social
responsibility within business organisations
(Elsayed, 2006) mean that understanding the
relationship between corporate governance
and social-environmental performance is
increasingly important. To date there are few
results on this issue. For instance, while Toms
(2002) found that institutional investors have a
positive impact on firm environmental reputa-
tion, other studies (e.g. Graves and Waddock,
1994; Cox et al., 2004) showed that institutional
owners invest in those firms that have a good
social and environmental reputation. Thus,
future studies are invited to investigate the
direction of causality between corporate gov-
ernance and corporate social-environmental
performance. Examining this relationship is
likely to advance knowledge, especially within
the field of socially responsible investment
(Mallin, 2002).
Acknowledgements
The author would like to thank the Editor
and two anonymous referees for their valu-
able comments and suggestions that have
improved the quality of this paper. Many
thanks are also due to Professor David Paton of
Nottingham University Business School for
his helpful comments.
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Khaled Elsayed holds a PhD from the Univer-
sity of Nottingham, UK, where he was a
member of staff. His research interests include
corporate governance, corporate social re-
sponsibility, environmental management and
operations management. His work has been
published in Structural Changes and Economic
Dynamic, Business Strategy and the Environment
and Journal of Business Ethics.
© 2007 The Author
Journal compilation © Blackwell Publishing Ltd. 2007