In this paper, I show that CEO power, which arises from differences in national culture, can weaken a firm’s governance. Based on a hand-collected dataset with more than 5000 forced and voluntary CEO transitions across 37 countries, I find that CEOs are less likely to be dismissed for bad performance in more hierarchical countries. The results are robust to alternative measures of hierarchy, a large battery of control variables, subsample analysis, placebo tests, and different empirical methodologies. Stronger hierarchies also allow for idiosyncratic managerial styles around exogenous turnover events of CEOs. Overall, the results suggest that the power and importance of CEOs vary across countries.

In 2011, German legislators passed the latest reform to German Insolvency Law (ESUG). ESUG mandates that creditors of larger firms can exert more influence on the appointment of the insolvency administrator, resulting in a shift of power from shareholders to creditors. Based on difference-in-differences estimation, we find that larger firms reduced financial leverage by about 4–7 percentage points relative to control firms. Furthermore, after the enactment of ESUG, larger firms spend less money on investment and pay higher interest rates. Overall, the evidence is consistent with the view that German creditor protection has become too strong.