Management entrenchment: Determinants and impact on firm performance of French listed companies

Purpose This paper aims to identify some determinants of management entrenchment and examine whether management entrenchment impacts firm performance.Motivation Despite more than three decades of empirical research and large theoretical background, the relationship between managers’ discretionary behaviour and firm performance has not yet been completely understood. That can be explained by the phenomena of management entrenchment. Theoretical background as well as previous empirical results are often contradictory. For some authors, management entrenchment may affect firm performance negatively. Others consider it to be beneficial, since it may lead managers to choose riskier projects, which is more profitable for shareholders. Our study seeks to bridge this gap and contribute to the debate on the potential effect of management entrenchment on firm performance.Design/Methodology/Approach To measure management entrenchment, we construct an index based on some proxies from corporate governance mechanisms which are related to the position of the CEO within the company, namely: 1) CEO’s ownership, 2) CEO duality, 3) CEO retirement age, 4) CEO’s seniority and 5) Overinvestment. We regressed management entrenchment index on board of directors’ control, dividend policy, firm leverage, free cash flows, firm size and external audit’s quality. Then, we regressed firm performance, measured alternatively by the return on assets (ROA) the Market-to-Book ratio (MTB) on management entrenchment index, firm size and firm age. Our sample includes 90 French companies listed during 2008–2022 period.Main findings Our findings show that: 1) small firms, firms with small boards of directors and firms with lower leverage ratio tend to experience a high degree of management entrenchment and 2) management entrenchment has a significantly negative influence on firm performance, whether measured by an accounting-based proxy, the return on assets or by a market-based proxy, the Market-to-Book ratio.Practical implications/Managerial impact Our findings can help shareholders as well as regulators to establish corporate governance mechanisms which are able to reduce management entrenchment and therefore avoid dropping in firm performance.Novelty/Contribution Our study may contribute to a consensus on the relationship between management entrenchment and firm performance. Indeed, there is a conflict between theoretical backgrounds regarding the impact of management entrenchment on firm performance. This conflict may explain the mitigated results of previous empirical investigations. In addition, we adopted a new measure of management entrenchment and conducted empirical investigation on a different context that is French listed companies which have not been widely studied.