Executives can only impact firm outcomes if they have influence over crucial decisions. On the basis of this idea, we develop and test the hypothesis that firms whose CEOs have more decision-making power should experience more variability in performance. Focusing primarily on the power the CEO has over the board and other top executives as a consequence of his formal position and titles, status as a founder, and status as the board's sole insider, we find that stock returns are more variable for firms run by powerful CEOs. Our findings suggest that the interaction between executive characteristics and organizational variables has important consequences for firm performance.

We develop an equilibrium model to understand how the efficiency of capital allocation depends on outside investor protection and the external financing needs of firms. We show that when capital allocation is constrained by poor investor protection, an increase in firms' external financing needs may improve allocative efficiency by fostering the reallocation of capital from low to high productivity projects. We also find novel empirical support for this prediction.

Executives can only impact firm outcomes if they have influence over crucial decisions. On the basis of this idea, we develop and test the hypothesis that firms whose CEOs have more decision-making power should experience more variability in performance. Focusing primarily on the power the CEO has over the board and other top executives as a consequence of his formal position and titles, status as a founder, and status as the board's sole insider, we find that stock returns are more variable for firms run by powerful CEOs. Our findings suggest that the interaction between executive characteristics and organizational variables has important consequences for firm performance. Copyright 2005, Oxford University Press.