CEO Duality and Firm Performance:

Evidence from an Exogenous Shock to the Competitive Environment

*

Tina Yanga, , Shan Zhaob

a

School of Business, Villanova University, Villanova, PA, USA

b
Grenoble Ecole de Management, France

Abstract
Regulators and governance activists are pressuring firms to abolish CEO duality (Chief
Executive Officer also being the Chairman of the Board). However, the literature provides mixed
evidence on the relation between CEO duality and firm performance. Using the exogenous shock
of the 1989 Canada-United States Free Trade Agreement, we find that duality firms outperform
non-duality firms by 3-4% when their competitive environments change. Further, the
performance difference is larger for firms with higher information costs and better corporate
governance. Our results underscore the benefits of CEO duality in saving information costs and
making speedy decisions.

JEL classification: G34; G38; K22

Keywords: CEO duality, firm performance, corporate governance, endogeneity, competitive
environments

We would like to thank Yung-Yu Ma and David Yermack for their generosity in sharing their data with us. We
also thank Russell Chomiak, Paul Hanouna, Wan Hong, Steve Miller, Nancy Margolis, Shawn Mobbs, David
Oesch, Sukesh Patro, Jesus Salas, and the seminar participants at the 2011 Asian Finance Association International
Conference, the 2011 Financial Management meetings, the 2013 Conference of the Swiss Society for Financial
Market Research, the 2013 Conference Twenty Years after Cadbury, Ten Years after Sarbanes-Oxley: Challenges
of Corporate Governance, the 2013 International Finance and Banking Society Nottingham Conference, Lehigh
University, and Villanova University. We gratefully acknowledge research support from the Center for Global
Leadership at Villanova University.
Corresponding author: Tina Yang, Finance Department, Villanova University, 800 Lancaster Avenue, Villanova,
PA 19085, USA. Phone: (610) 519-5460. Fax: (610) 519-6881. E-mail: tianxia.yang@villanova.edu.

CEO Duality and Firm Performance:

Evidence from an Exogenous Shock to the Competitive Environment

Abstract
Regulators and governance activists are pressuring firms to abolish CEO duality (Chief
Executive Officer also being the Chairman of the Board). However, the literature provides mixed
evidence on the relation between CEO duality and firm performance. Using the exogenous shock
of the 1989 Canada-United States Free Trade Agreement, we find that duality firms outperform
non-duality firms by 3-4% when their competitive environments change. Further, the
performance difference is larger for firms with higher information costs and better corporate
governance. Our results underscore the benefits of CEO duality in saving information costs and
making speedy decisions.
JEL classification: G34; G38; K22
Keywords: CEO duality, firm performance, corporate governance, endogeneity, competitive
environments

1. Introduction
In this paper, we study the effect of CEO duality on firm performance using an
exogenous shock to the competitive environment. (CEO duality refers to a board leadership
structure in which the Chief Executive Officer (CEO) is the Chairman of the Board (COB).) The
exogenous shock is the 1989 Canada-United States Free Trade Agreement (FTA), which
eliminated all tariffs and other trade barriers between the two countries. Three drivers motivate
our research question: the recent regulatory push to abolish CEO duality, the growing trend of
U.S. firms separating the CEO and COB titles, and the ambiguity in the literature about whether
CEO duality is beneficial or detrimental to firm performance. Specifically, firms that received
assistance under the 2008 Troubled Asset Relief Program (TARP) were required to separate the
CEO and COB titles. The U.S. Congress introduced several proposals in 2009 that called for the
titles to be split. The Dodd-Frank Act of 2010 required the Securities and Exchange Commission
(SEC) to issue rules mandating that listed firms disclose the reasoning behind their board
leadership structure. 1 Under pressure, U.S. firms appear to have modified their decisions
regarding CEO duality. As Fig. 1 shows, from the 1970s until the early 1990s, over 80% of large
U.S. firms had combined titles. The figure fell to 54% in 2010.
The above trends are unsettling given the lack of clear theoretical predictions and mixed
empirical evidence on the performance impact of CEO duality. The main argument against CEO
duality (or dual leadership) is based on agency theory, which predicts that CEOs, as agents of
shareholders, do not always act in the best interests of shareholders. As the board of directors is
the apex of the decision control system of corporations, entrusting CEOs with the office of COB
exemplifies the ultimate conflict of interest. The main argument in favor of dual leadership
1

Prior to the Dodd-Frank Act, the SEC had already adopted the final rules in this regard on December 16, 2009,
which became effective on February 28, 2010. Proxy Disclosure Enhancements are available at
http://www.sec.gov/rules/final/ 2009/33-9089.pdf.

emphasizes the unparalleled firm-specific information of CEOs and firms ability to quickly
respond to changing environments due to unified leadership (Brickley, Coles, and Jarrell, 1997;
Larcker and Tayan, 2011). A large body of literature has developed over the years in an attempt
to solve empirically the debate over the efficacy of CEO duality. However, the evidence
produced so far is mixed due to endogeneity and heterogeneity challenges (Hermalin and
Weisbach, 2003; Adams, Hermalin, and Weisbach, 2010).
We add to the literature by analyzing the effect of CEO duality on firm performance in a
new framework that mitigates the endogeneity and heterogeneity issues. Specifically, by using an
exogenous shock to the competitive environment and relating post-shock firm performance to
pre-shock board leadership structure, our research design mitigates the endogeneity problem
caused by reverse causality, namely whether a certain board leadership structure improves firm
performance or whether better performing firms tend to adopt certain board leadership structures.
Heterogeneity problems arise because firms face different optimization problems and are driven
to heterogeneous solutions. For example, large boards can be beneficial to complex firms but
harmful to non-complex firms (Coles, Daniel, and Naveen, 2008). Conditioning the dualityperformance relation on firms responding to one common shock mitigates the heterogeneity
problem, because the shock disrupts the status quo and forces firms with different characteristics
to find new solutions to the same problem. 2 Further, our research design mitigates unobserved
heterogeneity that potentially drives firms choices of board leadership structure by exploiting
performance differences across duality and non-duality firms under different tariff rates.
2

Our research design may not eradicate the heterogeneity problem, because firms of different characteristics likely
incur different costs and benefits in solving the same problem and subsequently still find different optimization
solutions. However, as the exogenous shock disrupts firms exiting equilibrium solutions to the choice problem of
board leadership structure, it is useful to study the duality-performance relation in transition states (i.e., before firms
find their new equilibrium solutions), particularly given that it is unclear ex-ante how the exogenous shock will
impact the duality-performance relation for firms of different characteristics. See Coles, Daniel, and Naveen (2008)
and Adams, Hermalin, and Weisbach (2010) for excellent discussion of the heterogeneity problem.

Our research design offers two additional benefits. First, although we study a conditional
effect, with the condition being increased competition and growing market opportunities, our
results have broad implications because more firms should operate under this condition as
globalization and technology advance. Second, our research design facilitates a direct test of the
main benefit of CEO duality. Dual leadership incurs lower information acquisition, transmission,
and processing costs than separate leadership, because CEOs accumulate unparalleled firmspecific information through running the daily operation of the firm (Jensen and Meckling, 1995;
Brickley, Coles, and Jarrell, 1997). An exogenous shock that increases competition and broadens
market opportunities magnifies the information benefits of CEO duality for two reasons. First,
competition and new market opportunities increase the value of information, especially the value
of specific information, because information generates market power and specific information is
more costly to acquire and transfer and therefore generates larger and more sustained
information rents (Jensen and Meckling, 1995). Second, competition and new market
opportunities demand fast and frequent decision-making as under these market conditions
information becomes obsolete at a faster rate and the consequences of lost opportunities due to
delayed decisions become more severe (Christie, Joye, and Watts, 2003). Dual leadership allows
firms to make speedier decisions and react more quickly to new information than separate
leadership because the former eliminates an extra chain of command, namely the non-CEO COB
(Larcker and Tayan, 2011). These arguments, which we call the information advantage argument
of CEO duality, suggest that post trade liberalization, the value contribution of dual leadership is
greater for firms with high information costs than for firms with low information costs.
We study 1,926 U.S. firms from 1979 to 1998 and find that post trade liberalization
duality firms outperform non-duality firms. Among the firms that experience elimination of

import tariffs, dual leadership increases Tobins Q by 2.95%. Among firms that experience
elimination of export tariffs, dual leadership increases Tobins Q by 3.83%. The results are
robust to various robustness checks, including controlling for firm fixed effects and firm-level or
industry-level clustering, temporary changes in board leadership structure due to CEO
succession, and additional operating and governance variables that potentially affect firm
performance. To test the information advantage argument of CEO duality, we partition firms
based on the level of information costs before trade liberalization. Consistent with the
information advantage argument, the performance contribution of dual leadership is stronger for
firms with high information costs than for firms with low information costs.
An alternative explanation for our findings is that the exogenous shock to the competitive
environment reduces agency costs and that duality firms disproportionately benefit from such
reduction. To test this possibility, we partition the sample based on the strength of corporate
governance before trade liberalization. As firms with weak governance have higher agency costs
(Shleifer and Vishny, 1997; Hartzell and Starks, 2003), we should then find a stronger duality
effect in the partition of firms with weaker governance if our results are driven by a reduction in
agency costs. We find the opposite. The positive effect of dual leadership is stronger for firms
with higher total institutional ownership, higher holdings by block institutional investors, and
higher holdings by the top five institutional investors.
As the literature is replete with evidence that competition is the enemy of the sloth
(Nickell, 1996; Bertrand and Mullainathan, 2003; Giroud and Mueller, 2010), we also test
whether dual leadership has positive effects on firm performance after controlling for efficiency
gains due to increased competition. We find that post trade liberalization firms that receive tariff
concessions and improve efficiency or reduce input costs have higher Tobins Q. Importantly,

the performance contribution from dual leadership exceeds the performance contribution from
efficiency gains.
We also examine the time trend of dual leadership from 1988 to 1998, as evolutionary
theory predicts that firms adopt the winning governance arrangements over time. We observe a
steady increase in the percentage of firms that combined the CEO and COB titles from 1988 to
1993. However, that percentage has been declining since 1993, which is one year after the launch
of the global movement by regulators toward the separation of CEO and COB titles (Dahya,
Garcia, and Bommel, 2009, p. 180). 3
Our paper makes several contributions. First, the literature lacks clear evidence on the
impact of CEO duality on firm performance due to the endogeneity and heterogeneity issues
(Hermalin and Weisbach, 2003; Adams, Hermalin, and Weisbach, 2010). We use an exogenous
shock to a firms competitive environment, thereby mitigating these econometric challenges, and
find evidence that CEO duality is beneficial to firm performance when competition intensifies
and market opportunities expand. Second, although arguments in favor of dual leadership are
well developed, the literature lacks empirical evidence directly linking the benefits of dual
leadership to firm performance. We provide direct evidence for the information benefits of dual
leadership. Third, our results, together with Bloom and Van Reenen (2007), shed light on some
seemingly puzzling phenomena in practice. Firms have been under enormous pressure to abolish
CEO duality for over two decades. In many countries, separate leadership has become the norm.
For example, in the late 1980s, a majority of U.K. firms combined the CEO and COB titles.
Now, less than 5% of U.K. firms still do. In contrast, U.S. firms and some U.S. investors have

Between 1992-2004, reports sponsored by national governments, major stock exchanges, or both in at least 16
countries outside of the U.S. recommended splitting the CEO and COB titles. The global movement toward the
separation of the CEO and COB positions can be traced back to the 1992 Cadbury Report, a report issued by a
committee appointed by the Conservative Government of the United Kingdom (Dahya, Garcia, and Bommel, 2009).

been reluctant to embrace the practice. 4 We find that duality firms outperform non-duality firms
when competitive environments change. Bloom and Van Reenen (2007) find that the U.S. has
one of the most competitive markets in the world. Our results, viewed together with those of
Bloom and Van Reenen (2007), suggest that firms adopt the winning governance structure in
response to their competitive environments. Therefore, our results have important policy
implications given the strong push for U.S. firms to abolish CEO duality.
The rest of the paper is organized as follows: Section 2 presents the arguments in favor of
and in opposition to dual leadership and summarizes the literature on the duality-performance
relation; Section 3 discusses the research design; Section 4 describes the data collection and the
sample; Section 5 and 6 present the empirical results; finally, Section 7 concludes.
2. Institutional background
2.1. Arguments regarding the costs and benefits of dual leadership
The arguments against dual leadership (or in favor of separate leadership) are largely
based on the agency theory. CEOs of modern corporations have decision rights but not control
rights over shareholder capital. As a result, CEOs have conflicting interests and do not always
act to maximize shareholder value. The board of directors is the apex of the decision control
system of modern corporations, which mitigates agency problems due to the separation of
ownership and control (Fama and Jensen, 1983). Having CEOs lead this decision control
hierarchy likely compromises the effectiveness of the control system and exemplifies the
ultimate conflict of interest. Supporting this conflict-of-interest argument, empirical studies find
4

Morgan, Poulsen, Wolf, and Yang (2011) find that mutual funds support 90% of the shareholder proposals that aim
to declassify the board, but support only 34% of the proposals that call to separate the CEO and COB positions. A
more recent example is the controversy over whether to strip Jamie Dimon (the CEO of J.P. Morgan Chase) of his
COB title at the 2013 shareholder meeting. While CalPERs and proxy advisory firms like Institutional Shareholders
Services and Glass, Lewis & Co are in favor of the shareholder proposal to separate the dual roles, the legendary
investor, Warren Buffet, and proxy advisory firms like Egan-Jones Proxy Services are against it. Also see Section 7
for more discussion on this issue.

that when CEO and COB titles are combined, CEO compensation is higher and the sensitivity of
CEO turnover to firm performance is lower (Core, Holthausen, and Larcker, 1999; Goyal and
Park, 2002). Proponents of separate leadership also argue that this arrangement allows the CEO
to focus on running the business, while the COB focuses on running the board. An independent
and experienced COB can also be a valuable resource and a sounding board for the CEO
(Dalton, Daily, Johnson, and Ellstrand, 1998).
The arguments in support of dual leadership emphasize the unparalleled firm-specific
knowledge of CEOs and the benefits of strong stewardship. As CEOs may often have the best
specific knowledge of the strategic challenges and opportunities facing the firm (Jensen and
Meckling, 1995, p. 13), a CEO who is also in charge of the board should be able to coordinate
board actions and implement strategies more swiftly, giving the firm a competitive edge
particularly in tough business conditions. As acquiring and transmitting firm-specific
information can be costly, dual leadership potentially enjoys large cost savings by eliminating
information transferring and processing costs associated with non-CEO chairmen. Consolidated
power also provides clarity regarding the leadership and direction of the firm, which promotes
effective dealing with external parties (Dalton, Daily, Johnson, and Ellstrand, 1998).
Additionally, the COB title is an integral part of the CEO incentive contract. If a firm does not
award the additional title of COB, its CEO may be less motivated to work and even consider
leaving the firm. 5 Firms that practice separate leadership may also have a more difficult time
recruiting new CEOs than firms that combine the titles (Larcker and Tayan, 2011).
Separating the dual roles can interfere with succession planning, i.e., the retiring CEO
remains on the board as the COB and relinquishes the COB title to the new CEO only after the

Jamie Dimon, the CEO of J.P. Morgan Chase, said that he may leave the bank if shareholders vote to separate the
CEO and COB positions at the 2013 annual meeting (Reuters, May 11, 2003).

new CEO successfully passes the probationary period (Brickley, Coles, and Jarrell, 1997;
Brickley, Coles, and Linck, 1999). Dual leadership saves certain costs that separate leadership
creates. Extra compensation to COBs can be sizable. Walt Disney paid $550,732 to its nonexecutive chairman in fiscal year 2009. Installing non-CEO COBs creates its own agency
problems in the form of who monitors the monitor (Brickley, Coles, and Jarrell, 1997). 6
In summary, it is not theoretically obvious whether dual or separate leadership is more
beneficial to firm performance. Therefore, the efficacy of CEO duality is an empirical question.
2.2. Mixed evidence on the relation between dual leadership and firm performance
Pi and Timme (1993) study 112 U.S. banks from 1987 to 1990 and find a higher return
on assets for those banks with separate titles. Brickley, Coles, and Jarrell (1997) study 661 U.S.
firms in the 1989 Forbes compensation survey and find that firms with separate leadership do
not perform better. Indeed, they conclude that duality firms are associated with better accounting
performance. To compare with Pi and Timme (1993), Brickley, Coles, and Jarrell (1997)
separately study banks and thrifts and find no significant differences in performance across firms
with different board leadership models. Palmon and Wald (2002) study announcements of board
leadership changes from 1896 to 1996. They find that small firms experience negative abnormal
returns when changing from dual to separate leadership, while large firms experience positive
abnormal returns. The results of Palmon and Wald (2002) are in contrast to Faleye (2007b), who
finds that dual leadership increases Tobins Q for complex firms, but decreases it for noncomplex firms. Dalton, Daily, Johnson, and Ellstrand (1998) conduct a meta-analysis of 31
studies, concluding that CEO duality does not affect performance and firm size does not
moderate the duality-performance relation.
6

In Appendix A, we give some examples of arguments that firms make to support their decisions of having a dual
leadership structure, including that it promotes clarity regarding the leadership of the firm, facilitates succession
planning, and enhances more effective business planning and execution.

Dey, Engel, and Liu (2011) study performance consequences of combining or splitting
the titles of CEO and COB from 2001 to 2009. They find that firms combining (splitting) the
titles have higher (lower) announcement returns and better (worse) post-announcement
performance. Larcker, Ormazabal, and Taylor (2011) investigate the market reaction to
legislative and regulatory actions from 2007 to 2009, including two proposed regulations that
would ban CEO duality. They find that the abnormal returns of these events are not related to the
presence of CEO duality, which is inconsistent with the view that CEO duality destroys value. In
1992, the Cadbury Committees Code of Best Practice called on U.K. firms to separate the titles
of CEO and COB. Using this external shock, Dahya, Garcia, and Bommel (2009) test whether
firm performance improved after the separation. They fail to find any performance improvement.
3. Research design
3.1. The Canada-United States Free Trade Agreement of 1989
On January 2, 1988, U.S. President Ronald Reagan and Canadian Prime Minister Brian
Mulroney signed the Canada-United States Free Trade Agreement (FTA), which eliminated
tariffs and other trade barriers between the two countries. To take effect, the FTA had to be
approved by the U.S. Congress and the Canadian Parliament. While it passed the U.S. Congress
smoothly, the FTA encountered strong opposition in Canada. Mulroneys Progressive
Conservative Party controlled the House, but the Senate, which had a Liberal Party majority,
refused to ratify the FTA until Canadians voted on the issue in a national election. Mulroney was
forced to dissolve the Parliament and called a general election. Although more Canadians were
against the FTA than in favor of it, Mulroneys party won the election as they benefitted from
being the only party in favor of the agreement, while the opposition parties split the anti-freetrade vote. The FTA took effect on January 1, 1989. Since the passage of the FTA was

improbable and unexpected, it qualifies as an exogenous shock (Brander, 1991; Thompson,

1993; Guadalupe and Wulf, 2010). The FTA is also a clean policy experiment, untainted by
confounding events such as macroeconomic shocks or financial crises (Trefler, 2004).
The FTA has been shown to significantly impact the competitive environment of U.S.
firms. For example, Clausing (2001) finds that the FTA significantly increases U.S. imports from
Canada, and that the increase is larger for goods with greater tariff reductions. In addition, the
FTA is associated with substantial employment loss, labor productivity gains, and changes in
price-cost margin (Trefler, 2004; Guadalupe and Wulf, 2010). As Appendix B shows, tariff
reductions on Canadian imports to the U.S. and U.S. exports to Canada can be as high as 36%
and 48%, respectively.
3.2. Empirical method
Like other corporate finance research, an analysis of the impact of dual leadership on
firm performance faces the challenges of endogeneity and heterogeneity (Adams, Hermalin, and
Weisbach, 2010; Wintoki, Linck, and Netter, 2012). Ideally to tackle these challenges we would
like to have an exogenous shock to board leadership structure. However, to the best of our
knowledge, such exogenous shocks to U.S. firms do not exist at this time. Therefore, like other
researchers (see, e.g., Frsard, 2010; Gormley, Matsa, and Milborun, 2013), we use an
exogenous shock that disrupts the relation between the endogenous choice variable and the
outcome variable. 7 The idea is that because the exogenous shock of the FTA is largely
unexpected, it is difficult to argue that firms optimally choose board leadership structure
beforehand to deal with the problems posed by the new competitive environment. Therefore,
relating pre-existing board leadership structure to post-shock firm performance mitigates the
7

Frsard (2010) uses tariff cut shocks to examine the effect of cash holdings on firm performance. Gormley, Matsa,
and Milborun (2013) explore a shock to workplace exposures to carcinogens and examine the effect of CEO
compensation on corporate risk-taking. Also see Zingales (1998).

10

endogeneity problem. As the exogenous shock only affects some firms, we also alleviate the
unobserved firm heterogeneity problem through benchmarking performance changes of firms
affected by the exogenous shock against performance changes of firms unaffected or less
affected by the exogenous shock. More specifically, we estimate the following baseline model to
assess the impact of dual leadership on firm performance:
Tobins Qit = 1duali*post89*tariffi + 2post89*tariffi

+ Xit + dt + di + it,

(1)

where i indexes firms, duali is a dummy that equals one if the firm has a stable board
leadership structure of the CEO being the COB, post89 is a dummy that equals one from 1989
onwards, tariffi is the average tariff rate for firm i during the period of 1986-1988, X is a vector
of firm characteristics such as firm size, dt are year dummies that control for time trends, di are
firm fixed effects that absorb time-invariant industry and firm heterogeneities, and it is the error
term adjusted for heteroskedasticity and firm-level clustering. 8 It is worth noting that without the
triple interaction term, this framework is a standard differences-in-differences specification with
continuous treatment that other studies (see, e.g., Guadalupe and Wulf, 2010) have used to
exploit the quasi-natural experiment of the 1989 trade liberalization.
To mitigate the endogeneity problems, we need to use board leadership in the event year
or just before (Low, 2009; Guadalupe and Wulf, 2010). Further, Brickley, Coles, and Jarrell
(1997) show that many instances of changes in board leadership are transient due to CEO
succession. To mitigate these problems, we require sample firms to exist in 1988 and follow a
stable board leadership model, i.e., no change in board leadership structure for more than 80% of
firm years for a minimum of four years from 1988 to 1998. For example, a firm with four years
of board data is classified as following a stable board leadership model only if it had the same
board leadership status during 1988-1991, a firm with nine years of board data is classified as
8

Our results hold if we use industry-level clustering instead of firm-level clustering.

11

following a stable board leadership model if it changed board leadership structure only once
during 1988-1996, and a firm with more than ten years of board data is classified as following a
stable board leadership model if it changed board leadership structure only twice during 19881998. 9
We use three measures of tariff concessions (tariffi) to capture the changes in competitive
environments: 1) the FTA-mandated U.S. tariff rate reduction (tariff_import) on Canadian
imports, 2) the FTA-mandated Canadian tariff rate reduction on U.S. exports (tariff_export), and
3) a score (tariff_rank) that we construct based on the rankings of the import and export tariff
rates. Specifically, we separately rank firms with positive import tariff rates and positive export
tariff rates into two groups. Firms with above-average tariff rates receive a score of two, while
firms with below-average tariff rates receive a score of one. As a firm can have an above-average
import tariff rate and an above-average export tariff rate, the maximum value of tariff_rank is
four. A firm with a zero import tariff rate and a zero export tariff rate receives a score of zero.
Therefore, tariff_rank captures the aggregate effect that the 1989 FTA has on a firm in terms of
both increased competition and expanded market opportunities. While all tariffs were scheduled
to go to zero after 1989, some tariff reductions took effect immediately and others were to be
phased out over ten years. This phase-out schedule is a potential source of endogeneity. To
address this problem, we follow Guadalupe and Wulf (2010) and treat all industries equally
regardless of their phase-out schedules by exploiting the differential tariff rates during 19861988. In other words, the tariff rates (tariffi) are the average tariff rates of 1986-1988.
We choose Tobins Q as our primary measure of firm performance because it is the
conventional proxy for firm performance in corporate finance literature, including studies on the

We also use board leadership structure in 1988 as a robustness check. Our results hold using this alternative
definition of duali. We discuss this robustness check in more detail in Section 5.1.3.

12

impact of the board of directors on firm performance (see, e.g., Hermalin and Weisbach, 1991;
Yermack, 1996; Faleye, 2007a). Further, Tobins Q measures the present value of all future cash
flows over the replacement cost of tangible assets. Therefore, it captures all aspects of firm
operation including managerial entrenchment (Lang and Stulz, 1994). We control for other firm
characteristics that might affect Tobins Q, including firm size (the natural logarithm of total
book assets), current-year ROA, one-year and two-year lagged ROA, growth opportunities (sales
growth over the past three years), capital structure (long-term debt over total book assets), and
risk (annualized daily stock return volatility). We define these and other variables and their
computation in Table 1.
4. Sample
As noted earlier, the FTA was implemented in 1989, but had a phase-out schedule of ten
years. Lileeva and Trefler (2010) report that by 1996 the tariff was down to less than one-fifth of
its 1988 level, and by 1998 all tariffs were eliminated. Therefore, we choose 1979-1998 as our
sample period to have an equal number of years before and after 1989. Import tariff data come
from Feenstra (1996), while export tariff data come from Trefler (2004). Tariff rates are
aggregated from the commodity level to the level of the four-digit Standard-IndustrialClassification (SIC) codes. To get firm-level tariff rates, we first obtain segment sales and the
four-digit SIC codes associated with each segment from the Compustat Segments Database, then
weigh the tariff rates at the level of the four-digit SIC codes by firms segment sales and sum the
weighted rates. 10

10

Using segment sales and four-digit SIC codes from the Compustat Segments Database to compute weighted tariff
rates yields a more precise measure of tariff concessions than using tariff rates based on the four-digit SIC codes
from the Compustat North America Database. This is because the Compustat North America Database assigns the
four-digit SIC codes to a firm based on the greatest value of product shipments for a product group. As an example,
if a firm produces two products with 40% of its shipments in SIC 2046 and 60% in SIC 6519, the assigned SIC code
would be 6519. The import tariff rate for SIC 2046 is 0.045 and for SIC 6519 is zero. Thus, using four-digit SIC

13

Table 2 provides key summary statistics for tariff rates in 1988. We report the data only
for 1988 because it is the year immediately preceding the implementation of the 1989 FTA and
because the firm-level tariff rates (tariffi) are constant throughout the sample period under our
research design. Two patterns are worth noting. First, if a firm receives the FTA-mandated
import tariff reduction, the firm also likely receives the FTA-mandated export tariff reduction.
Indeed, while the FTA affects 66% of the sample, 80% of the 66% sample firms receive both
import and export tariff reductions. Appendix B confirms this overlap. For example, the Rubber
and Plastics Footwear industry (SIC=3021) has the highest import tariff rate and one of the
highest export tariff rates. Second, when firms receive both import and export tariff reductions,
their import and export tariff rates are higher than the rates of firms that receive only one type of
tariff concessions. Because of the high correlation between import and export tariff rates, we do
not include tariff_import and tariff_export simultaneously in the regressions, but use tariff_rank
instead.
To be selected for our sample, the firm cannot be a utility or a financial institution, must
follow a stable board leadership model (as defined in 3.2), and must have positive values of total
assets and net sales, daily stock returns for at least a quarter of the fiscal year, and Compustat
data before 1989. We obtain financial data from Compustat North America, segment sales from
Compustat Segments, and stock returns from CRSP. Board and ownership data come from the
SEC Compact Disclosure Database. To the best of our knowledge, the Disclosure database
provides the earliest coverage for board structure of publicly traded firms, which starts in 1988.
Although Disclosures data coverage does not go back to 1979, which is the start of our sample
period, it is not a concern to our multivariate tests because our research design requires using

codes from the Compustat North America Database will yield a tariff rate of zero, while using segment sales and
four-digit SIC codes from the Compustat Segments Database will yield a tariff rate of 0.018 (0.045*0.4=0.018).

14

board structure in the event year or just before (the event year for our study is 1989). The final
sample consists of 1,926 unique firms (25,246 firm years) from 1979 to 1998, or 1,180 unique
firms (16,156 firm years) that have stable dual leadership and 746 unique firms (9,090 firm
years) that have stable separate leadership. Table 3 reports the summary statistics of key firm
characteristics. To mitigate the problem of extreme outliers, we winsorize all operating variables
at the 1% level at both tails except for Tobins Q, total assets, and the number of business
segments, which will be in natural logarithm form in the regressions. The percent of the sample
firms with stable dual leadership is 64%, which is lower than the percentage (about 80%) that
other studies report for similar time periods (Fig. 1). This occurs because the SEC Compact
Disclosure database covers a much larger and more comprehensive set of firms, and small firms
are more likely to have separate leadership (Linck, Netter, and Yang, 2008).
Fig. 2 contrasts time trends of median values of Tobins Q for firms with stable duality
status against firms with stable non-duality status. As we defined earlier, firms with stable
duality status (duality firms) have the CEO as the COB for more than 80% of firm years for a
minimum of four years from 1988 to 1998, while firms with stable non-duality status (nonduality firms) are those who have a non-CEO COB for more than 80% of firm years for a
minimum of four years from 1988 to 1998. We report median values of Tobins Q to mitigate the
problem of outliers. We graph the time trends separately for firms impacted by the 1989 FTA
(Panel A) and firms not impacted by the 1989 FTA (Panel B).
A cursory inspection of Panel A suggests that for firms impacted by the 1989 FTA, those
with dual leadership have similar valuation as those with separate leadership prior to 1989. Post
the trade liberalization, Tobins Q increases for firms of both types of leadership models,
although the increase appears to be larger for duality firms. Fig. 2 Panel B shows that for the

15

sample not impacted by the 1989 FTA, duality and non-duality firms exhibit similar trends in
Tobins Q. In this sample, we do not observe an obvious shift in trends nor a clear separation in
Tobins Q between duality and non-duality firms around 1989 as we do for the sample that is
impacted by the 1989 FTA. It is interesting to note that for the sample not impacted by the 1989
FTA, duality firms have higher Tobins Q than non-duality firms for most of the sample years.
This pattern is in line with the existing evidence that better performing CEOs are rewarded the
additional title of the COB (Brickley, Coles, and Jarrell, 1997). Overall, Fig. 2 offers suggestive
evidence that duality firms outperform non-duality firms when the business environment
becomes more competitive and dynamic.
5. Main results
5.1. Impact of dual leadership on firm performance
Columns (1), (2), and (3) of Table 4 report regression results from the baseline model,
Eq. (1), using import tariff rates, export tariff rates, and tariff ranks, respectively. The coefficient
of dual*post89*tariff_import is significantly positive in Column (1). The average import tariff
rate for the sample used in the regression is 1.69%. This result suggests that duality firms, which
receive the FTA-mandated tariff cuts on Canadian imports, experience an increase of 2.95% in
Tobins Q, compared to non-duality firms that also receive the FTA-mandated tariff cuts. Using
export tariff rates, we find similar results. The coefficient of dual*post89*tariff_export is
significantly positive in Column (2). Given that the average export tariff rate for the sample used
in the regression is 2.85%, the result suggests that dual leadership increases Tobins Q by 3.83%.
When using tariff ranks, we again find corroborating results. As defined in Section 3.2, tariff
rank is a score based on the rankings of a firms import and export tariff rates. An above-average
tariff rate receives a score of two, a below-average tariff rate receives a score of one, and a zero

16

tariff rate receives a score of zero. Therefore, with the coefficient of dual*post89*tariff_rank
being 0.028, the result suggests that an increase of one rank is associated with an increase of
2.79% in Tobins Q. The economic size of the valuation impact of dual leadership is similar to
that of board size. Yermack (1996) finds that expanding an eight-member board by one director
is associated with a decrease of 4% in Tobins Q. 11
Estimation results of our control variables are qualitatively similar to the existing
literature. For example, Tobins Q is negatively and significantly related to firm size and stock
return volatility, similar to the findings in Anderson and Reeb (2003). Tobins Q is positively
and significantly related to sales growth and ROA, similar to the findings in Yermack (1996) and
Anderson and Reeb (2003).
5.1.1. Impact of dual leadership, controlling for additional operating and governance variables
We re-estimate Eq. (1), controlling for other operating and governance variables that
potentially impact Tobins Q. Trade liberalization likely has a smaller effect on diversified firms
(Frsard and Valta, 2012). A plethora of academic and anecdotal evidence shows (see, e.g.,
Frsard, 2010) that large cash reserves give firms a competitive edge when business
environments suddenly change. Therefore, as a robustness check, we add to our baseline model
the natural logarithm of the number of business segments and zCash. Following Frsard (2010),
we compute zCash as last years cash-to-assets ratio minus the industry-year mean over the
industry-year standard deviation. As Columns (1), (3), and (5) of Table 5 show, our results hold
when we control for these aspects of firm operation using import tariff rates, export tariff rates,
and tariff ranks, respectively. In Columns (2), (4), and (6) of Table 5, we also control for the
potential effects of board size, board composition, D&O ownership, and institutional ownership.
11

Board leadership, board size, and board composition are arguable three most heavily analyzed board features. So
far, the literature has not found any significant relation between board composition and firm performance (see, e.g.,
Hermalin and Weisbach, 1991; Hermalin and Weisbach, 2003; Adams, Hermalin, and Weisbach, 2010).

17

As the SEC Compact Disclosure database starts the data coverage in 1988, we set the 1979-1987
values of board size, board composition, D&O ownership, and institutional ownership to be the
same as the 1988 values. Inclusion of these governance variables does not change our results.
5.1.2.

Impact of dual leadership on ROA and ROE

As discussed in Section 3.2, we believe that Tobins Q is the best measure of firm

performance for the purpose of our study. However, for completeness, we also test the impact of
dual leadership on operating performance using the accounting measures of return on assets
(ROA) and return on equity (ROE). ROA and ROE are earnings before interests and taxes
(EBIT) over book value of total assets and book value of common equity, respectively. A few
caveats are in order. First, while competition unambiguously promotes efficiency (Nickell,
1996), its impact on profitability is less clear (Nickell, 1996; Giroud and Mueller, 2010; Frsard
and Valta, 2012). Second, accounting measures are prone to managerial manipulation. For
example, Balakrishnan and Cohen (2011) show that in response to competition firms may
increase or decrease financial misreporting. As Table 6 shows, dual leadership has no significant
impact on ROA and ROE for firms that receive tariff concessions on Canadian imports.
However, dual leadership has a significantly positive impact on ROE for firms that receive tariff
reduction on U.S. exports. We also find a significantly positive effect of dual leadership on ROE
using tariff_rank.
5.1.3.

Additional robustness checks

For robustness, we use an alternative definition of duali. Specifically, we replace the

measure of stable board leadership structure, which is defined in Section 3.2, with the board
leadership of 1988, which is a dummy that takes the value of one if a firm combined the CEO
and COB positions in 1988. We re-run the baseline model using this dummy and obtain similar

18

results. For example, firms that receive import tariff concessions experience an increase of
2.13% in Tobins Q, if they had a dual leadership structure in 1988. Firms that receive export
tariff concessions experience an increase of 3.62% in Tobins Q, if they have a dual leadership
structure in 1988. When we use tariff ranks, we find that an increase of one rank is associated
with an increase of 2.10% in Tobins Q. In each case, the significant level is at the 1% level or
better.
The FTA affects only the tradable sector (i.e., SIC codes up to 4000). Therefore, as
another robustness check, we re-run the baseline regression, Eq. (1), for two scenarios: 1) firms
whose primary SIC codes are less than 4000; and 2) manufacturing firms (i.e., firms whose
primary SIC codes are between 2000-3999). This restriction reduces the number of observations
to 15,883 and 17,806 firm years for the first and the second scenarios, respectively. Our results
remain qualitatively the same in each scenario. As we discussed in Section 4, we choose to study
firms of all SIC codes, because we want to assess the impact of the FTA on a firm regardless of
whether the FTA affects the primary industry to which the firm is assigned. Further, duality and
non-duality firms not affected by the 1989 FTA serve as useful control groups for duality and
non-duality firms affected by the 1989 FTA.
We are not aware of any shocks that occurred in 1989 and impacted board leadership
structure. Studies such as Rechner and Dalton (1991), Brickley, Coles, and Jarrell (1997), and
Faleye (2007b) collectively show that the percent of firms with dual leadership is stable for the
period from 1978 to 1995. Nevertheless, as another robustness check, we add dual*post89 to the
baseline model to control for the possibility that other shocks contemporaneous with the FTA
could

systematically

affect

duality

and

non-duality

firms.

The

coefficient

of

dual*post89*tariff_export is still significantly positive, but dual*post89 interacted with

19

tariff_import and tariff_rank are no longer significant. Multicollinearity likely causes the latter
two predictors to lose their significance. The variable of dual lacks variation across time. Given
that we already control for time and firm fixed effects, adding dual*post89 to the baseline
regression introduces substantial noise in estimating variables interacted with dual. Consistent
with this idea, the Wald test shows that dual*post89*tariff_import is jointly significant with
post89*tariff_import and dual*post89 at the 1% level and dual*post89*tariff_rank is jointly
significant with post89*tariff_rank and dual*post89 at the 1% level. Further, adding dual*post89
does not improve the value of adjusted R-squared, suggesting that dual*post89 is an unnecessary
predictor variable. 12
To summarize, we find strong evidence that dual leadership is superior to separate
leadership when firms business environments become more competitive and dynamic. We find
it instructive that the effect of dual leadership is stronger among firms impacted by export tariff
concessions than among firms impacted by import tariff concessions. As Appendix B and Table
2 show, tariff reductions are steeper on U.S. exports than on Canadian imports. Thus, this pattern
is also consistent with the idea that dual leadership is more conducive to better firm performance,
as steeper tariff reduction likely induces larger shock to firms competitive environments.
5.2. Does dual leadership matter more for firms with high information costs?
According to the literature (see e.g., Brickley, Coles, and Jarrell, 1997), the main benefit
of dual leadership is its information advantage over separate leadership. As a CEO has
unparalleled firm-specific information, combining the CEO and COB titles incurs lower
information acquisition, transmission, and processing costs than separating the titles.
Competition magnifies the information benefits of dual leadership, because slow information
transmitting and processing delays decision-making and when competition is intense,
12

Results of these and the following robustness checks are available upon request.

20

information becomes obsolete at a faster rate and the consequences of lost opportunities due to
delayed decision-making become more severe (Christie, Joye, and Watts, 2003). Consistent with
this idea, the economic literature shows that firms decentralize when they need to respond
quickly to product market competition and when local managers have an information advantage
over their headquarters (Acemoglu, Aghion, Lelarge, Van Reenen, and Zilibotti, 2007; Bloom,
Sadun, and Van Reenen, 2010; Guadalupe and Wulf, 2010). To test the information advantage
argument, we study next the impact of dual leadership on firm performance, partitioning the
sample based on the levels of information costs in 1988. If competition magnifies the
information benefits of dual leadership, we should find a stronger duality effect for firms with
high levels of information costs than for firms with low levels of information costs post trade
liberalization.
Following the literature, we use three variables to measure the level of information costs:
research and development (R&D) expenditure over sales, advertising expenditure over sales, and
intangible assets over total book assets. Studies establish that R&D involves specialized inputs
that are unique to the investing firm and is a powerful proxy for information that is privy to
insiders and costly to transfer and process (Levy, 1985; Titman and Wessels, 1988; Aboody and
Lev, 2000). In terms of advertisement, firms that spend heavily on advertisement likely have
more unique products and non-standardized production inputs (Levy, 1985; Titman and Wessels,
1988). As an advertising campaign is frequently tied to a specific product or company,
advertising itself also creates an intangible asset that is non-transferable (Grullon, Kanatas, and
Kumar, 2006). These considerations suggest that advertising expenditures should be positively
associated with information transmission and processing costs. Lastly, intangible assets likely
capture the level of soft information, which is costly to transfer across parties and over

21

geographic distance (Alam, Chen, Ciccotello, and Ryan, 2012). Further, intangible assets such as
company reputation, customer relationships, and intellectual properties do not have obvious
physical value. Their value critically depends on a firms ability to adapt to the changing
environment and capitalize on new opportunities. 13
Table 7 reports the regression results when we separately run the baseline regression, Eq.
1, for firms with high and low information costs. For brevity, we tabulate regression results only
for tariff_rank, as it captures the aggregate shock of both import and export tariff reductions to
firms competitive environments and results using tariff_import and tariff_export are frequently
similar. Columns (1) and (2) report the results using R&D spending as the proxy for the level of
information costs. Following the literature (see, e.g., Himmelberg, Hubbard, and Palia, 1999;
Linck, Netter, and Yang, 2008), we replace missing R&D spending with zero. Contrary to the
information

advantage

argument

of

dual

leadership,

the

coefficient

estimate

of

dual*post89*tariff_rank is significantly positive for firms with low levels of R&D spending and
is insignificant for firms with high levels of R&D spending. We find the same pattern when
using tariff_import. However, we find evidence consistent with the information advantage
argument of dual leadership when using tariff_export. Specifically, the coefficient estimate of
dual*post89*tariff_export is 3.115 with a p-value of 0.006 for the sample with high R&D
spending and is 1.058 with a p-value of 0.005 for the sample of low R&D spending. Using R&D
spending has one limitation, because firms are not required to disclose R&D expenditures if they
13

A prime example is Eastman Kodak. In 1976, Kodak accounted for 90% of film and 85% of camera sales in
America. An innovation giant of its day, Kodak had invented the first digital camera just a year earlier. Despite the
fact that it pioneered the digitization revolution and predicted in 1979 that digital would replace film by 2010,
Kodak was too slow to change. As Rick Braddock (a Kodak director from 1987 to 2012) puts it, the mindset of the
company was ready for the challenge: it was Batten down the hatches. We sold the healthcare business and we
started the process of developing a digital response. But the way the market shifted was dramatically faster than we
had anticipated or than Id ever seen (Financial Times, 2 April 2012). By contrast, Fujifilm, which had been a longtime competitor to Kodak and enjoyed a strong, long-time monopoly on camera film in Japan like Kodak did in the
U.S., was able to adapt to the changing world. For the fiscal year of 2011, Fujifilm reported a net income of 769
million, while Kodak reported a net loss of 764 million. Kodak declared bankruptcy on January 19, 2012.

22

are immaterial. Although using the 1988 values has the econometric benefit of conditioning the
duality-performance relation on pre-determined levels of R&D spending, estimation noise arises
if certain firms disclose R&D spending in some years and do not in others. Therefore, as a
robustness check, we partition the sample based on whether a firms R&D is greater than zero in
a given year. The median value of R&D spending is zero for the full sample period and for the
1988 year. Using the median value of all firm years to partition the sample has the additional
advantage of having similar numbers of observations in each sub-sample. We find evidence
consistent with the information advantage argument using all three tariff rates.
Columns (3) and (4) of Table 7 report the results using advertising spending as the proxy
for the level of information costs. Consistent with the information advantage argument of dual
leadership, the coefficient estimate of dual*post89*tariff_rank is significantly positive for firms
with high levels of advertising spending and is insignificant for firms with low levels of
advertising spending. We find similar results using tariff_import and tariff_export. Similar to
R&D spending, for further robustness, we replace missing advertising spending with zero,
partition the sample based on the median value of a firms advertising spending in a given year,
and re-run the baseline model. Again, we find similar results when using all three tariff rates.
Columns (5) and (6) of Table 7 report the results from using intangible assets as the
proxy for the level of information costs. Again, the results support the information advantage
argument of dual leadership. Our results hold using import and export tariff rates. In untabulated
results, we use an alternative measure for intangible assets, which is one minus the ratio of
tangible assets over total book assets. Following Berger, Ofek, and Swary (1996), we compute
tangible assets by taking the sum of 0.715*receivables, 0.547*inventory, and 0.535*Property,
Plant and Equipment. We find similar results using this alternative measure of intangible assets.

23

One potential concern is that the levels of R&D spending, advertising spending, and
intangible assets are systematically related to tariff rates. In such a case, we may capture the
effect of dual leadership associated with changes in the competitive environment instead of
different levels of information costs. To mitigate this concern, we include in the regressions only
firms with above-average tariff rates and firms that are not impacted by the 1989 FTA. Our
results remain qualitatively the same.
5.3. Can reduction in agency costs explain the results?
In the preceding section, we find evidence that the information advantages of the CEO
contribute to the positive effect of dual leadership on firm performance. The main argument
against dual leadership is based on the agency theory, which predicts that CEOs, as agents of the
shareholders, do not always act in the best interests of the shareholders. As product market
competition is arguably the best governance device in minimizing the agency costs (Shleifer and
Vishny, 1997), an alternative explanation may account for our results. Specifically, the
exogenous shock of the 1989 FTA increases competition, forcing firms to reduce agency costs,
and duality firms disproportionately benefit more than non-duality firms from competitioninduced agency cost reduction.
To test this alternative explanation, we partition the sample based on the strength of
corporate governance in 1988, the year immediately preceding the 1989 trade liberalization, and
re-run the baseline regression. If reduction in agency costs drives our results, we should find a
stronger duality effect in the sample of firms with weak governance than in the sample of firms
with strong governance. 14 Following the literature (see, e.g., Shleifer and Vishny, 1997; Hartzell

14

We assume that firms with strong corporate governance have lower agency costs and firms with weak corporate
governance have higher agency costs. This assumption is consistent with a large body of empirical evidence (see,
e.g., Hartzell and Starks, 2003; Agrawal and Chadha, 2005; Dittmar and Mahrt-Smith, 2007; Cornett, Marcus,
Tehranian, 2008).

24

and Starks, 2003; Frsard and Valta, 2012), we use institutional ownership, stock holdings by
block institutional investors, and stock holdings by top five institutional investors to proxy for
the strength of corporate governance. As the SEC Compact Disclosure Database does not have
detailed institutional ownership data, we obtain the data needed for our regression analysis in this
section from the Thomson-Reuters Institutional Holdings (13F) Database. As Table 8 shows, we
find that the positive effect of dual leadership is larger and more significant for firms with strong
corporate governance than for firms with weak corporate governance. Therefore, the results do
not support the agency cost reduction argument. Our findings are consistent with Morck,
Stangeland, and Yeung (2000) and Amore and Zaldokas (2012), who find that firms with weak
corporate governance perform poorly when competition intensifies.
5.4.

A horse race between dual leadership and efficiency gains

The literature is replete with empirical evidence that competition is the enemy of sloth

(Nickell, 1996, p. 724; Bertrand and Mullainathan, 2003; Giroud and Mueller, 2010). Therefore,
it is instructive to examine whether the duality effect remains when we consider efficiency gains
due to increased competition. For this test, we run a horse race by adding to the baseline model
various proxies for sloth including sales per employee, overhead costs, input costs, and employee
wage. Sales per employee is a turnover ratio that directly measures employee productivity and is
a common proxy for firm efficiency (see, e.g., Vining and Boardman, 1992; Clark, 1984).
Overhead costs is the ratio of selling, general and administrative expenses to sales. Input costs is
the ratio of the costs of goods sold to sales. Employee wage is the staff expense to employees.
Giroud and Mueller (2010) find that overhead costs, input costs, and employee wage all increase
once managers are insulated from competition and the takeover market. Similar to our treatment
of other operating variables, we winsorize sales per employee, overhead costs, and the ratio of

25

the costs of goods sold at the 1% level at both tails and use the natural logarithm of wage to
mitigate the outlier problem. As the results using tariff_import, tariff_export, and tariff_rank are
similar, we tabulate regression results only for tariff_rank.
As Table 9 shows, our results hold after controlling for different measures of sloth, with
the exception of employee wage. The variable of dual* post89*tariff_rank is insignificant in the
wage regression, likely because the number of observations is small. Many firms do not report
staff expense thereby reducing the number of observations in the wage regression by nearly 90%.
In the regressions of other proxies for sloth, dual*post89*tariff_rank is highly significant.
Further, the coefficient size is similar to that in the baseline model in Column (3) of Table 4. We
also find that firms that increase employee turnover and lower input costs after the trade
liberalization experience a larger increase in Tobins Q. These results are consistent with the
prevailing view that competition promotes efficiency. Importantly, the economic impact of dual
leadership is larger than those proxies for sloth. For example, Column (1) suggests that duality
firms with a tariff rank of two experience an increase in Tobins Q that is 2.61% higher than
duality firms with a tariff rank of one. For comparison, an improvement of 10 percentage points
in sales per employee is associated with an increase of 1.12% in Tobins Q. (Measures of sloth
are in decimals.) 15
6. Additional results
6.1. Duality effect or survival bias
Studies have found that CEOs with more decision-making power are associated with
more variable firm performance (Adams, Almedia, and Ferreira, 2005). If duality firms
15

As a robustness check, we exclude dual*post89*tariff_rank from the regressions and re-estimate the effect of
sloth*post89*tariff_rank. The idea is that if dual*post89*tariff_rank and sloth*post89*tariff_rank are highly
correlated, this may cause a downward bias of the coefficient estimates of sloth*post89*tariff_rank. We do not find
such is the case; we find that the coefficient estimates of sloth*post89*tariff_rank are stable. For example, when we
re-run the regression in Column (1) excluding dual*post89*tariff_rank, the coefficient estimate of
sloth*post89*tariff_rank is 0.113 with 1% significance.

26

experience larger variances in firm performance, then a sudden change in firms competitive
environments may disproportionately eliminate a larger number of poorly performing duality
firms than poorly performing non-duality firms. In such a case, our results may arise from a
survival bias instead of a detection of true performance enhancement due to dual leadership. To
assess this possibility, we study corporate failure rate. If we do not find a disproportionately
higher corporate failure rate for duality firms than non-duality firms among those firms that are
affected by trade liberalization, then the survival bias is not a concern for our results.
We construct the sample of failed firms using two different approaches. The first
approach uses Compustat and CRSP. Specifically, we first identify our sample firms that file for
Chapter 7 or Chapter 11bankcruptcy using Compustat data item STALT. We find 42 unique
firms. We then verify Compustat bankruptcy records against CRSP delisting data, namely
whether CRSP data item HDLRSN is coded 02 or 03. A code of 02 indicates that the firm
is in bankruptcy, while 03 indicates liquidation. Since a firm can continue to have stock price
data after filing for bankruptcy, a large gap sometimes exists between the delisting date in CRSP
and the date of the last financial statement in Compustat. For our sample, the mode of this gap is
three years, with a maximum of 14. To ensure that we robustly test the survival bias concern, we
want to be as aggressive as possible in identifying corporate failures for our sample period. Thus,
we treat a delisting firm as failed during our sample period if the gap between the delisting date
in CRSP and the date of the last financial statement in Compustat is less than or equal to four
years. Seventy-five percent of our sample firms are delisted within four years of the last financial
statement. We identify an additional 83 unique bankrupt firms using this process. Therefore, we
identify 125 corporate failures from 1988 to 1998 or 120 corporate failures post trade
liberalization (1989-1998). We use the year of the last financial statement as the year in which

27

the firm fails. We report corporate failure rates using the first approach for the sample period of
1988-1998 in Table 10 Panel A. We choose 1988 as our starting year, because to study the
impact of the 1989 FTA we require our sample firms to have financial data in 1988.
As the first approach is a crude way to identify corporate failures (e.g., it does not have
precise bankruptcy dates and may not include all bankruptcies or may incorrectly include nonbankruptcy events), we construct the second sample of failed firms using a proprietary
database. 16 The advantage of this database is that it contains all bankruptcies filed by U.S.
publicly traded firms and the bankruptcy filing dates. The disadvantage of the database is that it
covers only part of our sample period, 1991-1998. However, this partial coverage should not be a
concern, as we care about corporate failures in years after trade liberalization much more than in
years before. We report the time trend of corporate failure rates using the second approach in
Table 10 Panel B.
To provide another benchmark, we also report corporate failure rate for firms not
impacted by the 1989 FTA. If the relative failure rates of duality vs. non-duality firms that are
impacted by the 1989 FTA are similar to the relative failure rates of duality vs. non-duality firms
that are not impacted by the 1989 FTA, then it provides additional assurance that survival bias is
not a concern to our study. As Table 10 shows, the two approaches tell a consistent story. Of the
firms that are impacted by the 1989 FTA, duality firms do not have a higher failure rate than
non-duality firms after the trade liberalization. Additionally, the relative failure rates of duality
vs. non-duality firms that are impacted by the 1989 FTA are similar to the relative failure rates of
duality vs. non-duality firms that are not impacted by the 1989 FTA. We observe similar patterns

16

For more details about this database, please refer to Lemmon, Ma, and Tashjian (2009). We deeply appreciate and
thank Yung-Yun Ma for his generosity in sharing with us his manually-collected data.

28

when we separately analyze firms impacted by import tariff concessions and firms impacted by
export tariff concessions. In summary, survival bias does not appear to drive our results.
6.2. Event study results
We conduct an event study to assess the market perception of the value contribution of
dual leadership as the FTA came into effect. As there are no clear event dates, we follow the
long-run event study methodology in Chhaochharia and Grinstein (2007) and Wintoki (2007)
and calculate excess portfolio returns for an extended event window using the following fourfactor model:
Rpt-Rft =p + 1(Rmt- Rft) + 2SMBt + 3HMLt + 4MOMt + it,

(2)

where Rft is the risk-free rate. The first three factors, (Rmt-Rft), SMBt, and HMLt, are based
on Fama and French (1993) and measure the market excess return, the differences in returns
between portfolios of small and large stocks, and the differences in returns between portfolios of
high and low book-to-market stocks, respectively. The fourth factor, the momentum factor
(MOMt), is based on Carhart (1997). It measures the differences in returns between a portfolio of
stocks with high returns in the past year and a portfolio of stocks with low returns in the past
year. Rpt is the equally weighted portfolio of duality firms or non-duality firms that are affected
by the 1989 FTA. p is the daily excess portfolio returns relative to the four factors. To get an
annualized rate, we multiply p by 252 trading days. If the market perceives that the 1989 FTA
benefits duality firms more than non-duality firms, then a position long in the portfolio of duality
firms and short in the portfolio of non-duality firms should yield positive returns. We use daily
stock returns adjusted for delisting returns to perform our study. Based on our review of the
events, we choose four different event windows. Results are reported in Table 11.

29

As Table 11 shows, we do not find any significant results for any of our event windows.
One reason for the non-results could be that negotiations regarding a free-trade agreement
encapsulate an event that spans too long a period for our methodology to detect any statistically
significant effects. A free-trade regime between the U.S. and Canada had been on the working
agendas of both governments since the early 1900s. Canadian Prime Minister Mulroney formally
requested that the U.S. and Canada explore the possibility of a comprehensive free trade
agreement on September 26, 1985. It could also be that the U.S. stock market did not view the
implementation of the 1989 FTA as a significant event. Although the 1989 FTA was extremely
contentious in Canada to the extent that the Canadian general election of 1988 was largely fought
on this single issue, the FTA did not garner much attention in the U.S. It passed without any
fanfare in the House by a vote of 366 to 40 and in the Senate by a vote of 83 to nine. In fact,
polls show that up to 40% of Americans were unaware that the FTA had been signed compared
to 3% of Canadians. 17
6.3. Time trends of board leadership
Evolutionary theory of organizations predicts that firms adopt governance arrangements
that give them the competitive edge (see, e.g., Kole and Lehn, 1997; Fama and Jensen, 1983). If
dual leadership is a superior leadership structure in a competitive environment, we should expect
more firms to adopt this structure over time. In this section, we examine the time trend of dual
leadership in search of further corroborating evidence for our main results in Table 4.
As we are interested in firms response to the 1989 FTA, we require for this investigation
that the sample firms exist in 1988, but relax the requirement that the firms follow a stable board
leadership structure. Consequently, we have 13,627 firm years in the sample impacted by the
FTA and 12,110 firm years in the sample not impacted by the FTA. In Fig. 3, we plot the time
17

http://www.enotes.com/u-s-canada-free-trade-agreement-1989-reference/u-s-canada-free-trade-agreement-1989

30

trends of board leadership and board composition partitioned by whether a firm is impacted by
the FTA. We add the time trend of board composition to our study, because we want to place the
time trend of board leadership in the broader context of the development of board structure.
Regardless of whether they are impacted by the FTA, more firms appear to adopt dual
leadership from 1988 through the early 1990s, which is consistent with both the evolutionary
arguments that firms adopt the governance structure that maximizes their survival chances and
our earlier findings that dual leadership is a superior leadership structure in competitive and
growing business environments. However, the upward trend stalls after 1993. If anything, more
firms appear to move to separate leadership in the latter part of our sample period. Some key
events may have contributed to this change in trend. In 1992, the U.K. issued the Cadbury
Report, which called on firms to abolish the practice of combined CEO and COB positions and
arguably started the global movement toward abolishing CEO duality (Dahya, Garcia, and
Bommel, 2009). In the same year, the Conference Board, a global business membership
organization headquartered in the U.S., issued a report recommending that firms separate the two
titles. Therefore, the time trend of dual leadership suggests that firms decisions regarding board
leadership structure are not only a function of the competitive pressure from the product market
but also of a broad range of socioeconomic factors. Consistent with the notion that firms are
under increasing pressure to establish independent boards, Fig. 3 also shows that the ratio of
outside directors on the board steadily increases throughout our sample period.
7. Conclusion and Discussion
Despite the large body of literature on board leadership, the evidence on the relation
between board leadership structure and firm performance is mixed due to the endogeneity and
heterogeneity challenges. In this paper, we employ a new framework that mitigates these

31

challenges and find that dual leadership is beneficial to firm performance when competition
increases and the product market expands. Further, the positive effect of dual leadership is larger
when firms have high levels of information costs and better corporate governance.
Our results shed light on some seemingly puzzling phenomena in practice. Firms have
been under enormous pressure to abolish CEO duality for over two decades. While firms in other
countries seem to be more amicable to the idea, U.S. firms have been reluctant to change. For
example, in the late 1980s, a majority of U.K. firms combined the CEO and COB titles (Dahya,
Garcia, and Bommel, 2009). Now, less than 5% of U.K. firms still do.18 In contrast, the majority
of U.S. firms still have a dual leadership structure. Certain investors are also less enthusiastic in
supporting the effort to separate the CEO and COB titles than some other governance initiatives.
For instance, Morgan, Poulsen, Wolf, and Yang (2011) find that mutual funds support 90% of
the shareholder proposals that aim to declassify the board, but support only 34% of the proposals
that call to separate the CEO and COB positions. Our findings help explain the reluctance on the
part of U.S. firms and certain investor groups to embrace the independent COB. Our results also
complement Bloom and Van Reenen (2007), who find that the U.S. has the best management
practice of the four countries (U.S., U.K., France and Germany) surveyed. Bloom and Van
Reenen also find that poor management practice is more prevalent when product market
competition is weak and that the U.S. has the most competitive market of the four countries.
One limitation of our study is that we do not distinguish amongst non-CEO Chairmen,
e.g., whether the Chairman is a former or present employee of the firm or is an independent
director. This limitation is attributable partially to data availability and partially to the fact that
the practice of having an independent chair is a recent phenomenon. Firms made the noticeable
18

Financial Reporting Council, Developments in Corporate Governance 2011, available at

http://www.frc.org.uk/getattachment/5f4fada9-2a88-43a4-bbec-be15b6519e79/Developments-in-CorporateGovernance-2011-The-impact-and-implementation-of-the-UK-Corporate-Governance-and-Stewardship-Codes.aspx

32

move to adopt the practice of independent chairman after the passage of the Sarbanes-Oxley Act
of 2002. By 2007, just 13% of S&P500 firms have a truly independent chairman (PR Newswire,
July 30, 2012). 19 Despite the data limitation, we believe that our results are useful in
understanding the existing literature, which has historically defined board leadership structure
similarly to this paper. Our results are also useful in explaining corporate behaviors during our
sample period as well as at the present time. As we mentioned earlier, the majority of U.S. firms
still combine the CEO and COB positions.
Importantly, our results highlight the link between the identity of the COB and his
influence on firm performance. Prior literature has long argued that CEOs possess unparalleled
firm-specific information, which gives them a unique advantage over non-CEO chairmen in
leading the board of directors. We provide evidence explicitly linking information costs to the
positive impact of dual leadership on firm performance. Favaro, Karlsson, and Neilson (2010)
report that [a]t the outset of the decade [2000], roughly half of the North American and
European CEOs entering office were named chairman and CEO. In 2009s incoming class, that
number had fallen to 16.5% in North America and 7.1% in Europe. The current push towards
more independent chairmen will inevitably result in a more heterogeneous distribution of nonCEO chairmen. Future work is urgently needed to understand the identities and different
incentives of newly minted COBs, as well as how different types of COBs may have different
impacts on firm performance and corporate polices.

19

10 years later: Sarbanes-Oxley Act Continues to Shape Board Governance, available at

http://www.prnewswire.com/news-releases/10-years-later-sarbanes-oxley-act-continues-to-shape-board-governance164296516.html

33

Appendix A: Examples of Arguments Made by Firms in Support of Dual Leadership

Argument 1: COB selection is part of the succession planning process. The CEO is the best
person to set board agenda.
Honeywell, Inc., in its 2003 proxy statement, notes that [t]he Company has no fixed rule as to
whether these offices should be vested in the same person or two different people, or whether the
Chairman should be an employee of the Company or should be elected from among the nonemployee directors. The Board believes that this issue is part of the succession planning
process and that it is in the best interests of the Company to make such a determination when it
elects a new CEO. Under Honeywells Corporate Governance Guidelines, the Chairman
establishes the agenda for each Board meeting. The Board believes that the CEO is in the best
position to develop this agenda from among the many short-term and long-term issues facing
Honeywell.
available at http://www.sec.gov/Archives/edgar/data/773840/000095011703000983/a34157.txt

Argument 2: Dual leadership provides clarity regarding the leadership of the firm.
In their statement to oppose a shareholder proposal calling for a separate COB and CEO filed at
the 2010 annual shareholder meeting, the board of directors of Goldman Sachs reasons that
[t]he most effective leadership model for our firm at this time is to have the roles of CEO and
Chairman combined this structure helps to ensure clarity regarding leadership of the firm,
allows the firm to speak with one voice and provides for efficient coordination of Board action,
particularly in times of market turmoil or crisis. The combination of the Chairmans ability to
call and set the agenda for Board meetings with the CEOs intimate knowledge of our business,
including our risk management framework, provides the best structure for the efficient operation
of our Board process and effective leadership of our Board overall. This structure avoids
potential confusion as to leadership roles and duplication of efforts that can result from the roles
being separated, especially in complex firms like ours where the information necessary to make
critical decisions is often in flux.
available at http://www.sec.gov/Archives/edgar/data/886982/000119312510078005/ddef14a.htm

Argument 3: Dual leadership promotes more effective business planning and execution.
Office Depot, in their 2009 proxy statement, states that [t]he Board has given careful
consideration to separating the roles of Chairman and Chief Executive Officer and has
determined that the Company and its shareholders are best served by having Mr. Odland, serve
as both Chairman of the Board and Chief Executive Officer. Mr. Odlands combined role as
Chairman and Chief Executive Officer promotes unified leadership and direction for the Board
and executive management and it allows for a single, clear focus for the chain of command to
execute the Companys strategic initiatives and business plans.
available at http://www.sec.gov/Archives/edgar/data/800240/000119312509050893/ddef14a.htm

34

Appendix B: Top 20 U.S. Industries with Highest Import and Export Tariff Rates, 1986-1988
Four-digit
SIC
Import tariff
3021
0182
2342
2326
2075
2321
2325
2331
2335
3253
2311
2111
2337
2369
2252
2231
2381
2257
3262
3151

Rubber and Plastics Footwear

Food Crops Grown Under Cover
Brassieres, Girdles, and Allied Garments
Men's and Boys' Work Clothing
Soybean Oil Mills
Men's and Boys' Shirts, Except Work Shirts
Men's and Boys' Separate Trousers and Slacks
Women's, Misses', and Juniors' Blouses and Shirts
Women's, Misses', and Juniors' Dresses
Ceramic Wall and Floor Tile
Men's and Boys' Suits, Coats, and Overcoats
Cigarettes
Women's, Misses', and Juniors' Suits, Skirts, and Coats
Girls', Children's, and Infants' Outerwear, Not Elsewhere Classified
Hosiery, Not Elsewhere Classified
Broadwoven Fabric Mills, Wool (Including Dyeing and Finishing)
Dress and Work Gloves, Except Knit and All-Leather
Weft Knit Fabric Mills
Vitreous China Table and Kitchen Articles
Leather Gloves and Mittens

36.06%
33.40%
29.13%
28.88%
22.49%
21.90%
21.06%
20.86%
20.14%
20.00%
19.97%
19.33%
18.11%
18.10%
16.81%
16.53%
14.99%
14.69%
14.68%
14.56%

Export tariff
2082
2259
3151
2381
2369
2335
2361
2331
2386
2329
2321
2311
2342
2391
2253
2337
3021
3142
3143
3144

Malt Beverages
Knitting Mills, Not Elsewhere Classified
Leather Gloves and Mittens
Dress and Work Gloves, Except Knit and All-Leather
Girls', Children's, and Infants' Outerwear, Not Elsewhere Classified
Women's, Misses', and Juniors' Dresses
Girls', Children's, and Infants' Dresses, Blouses, and Shirts
Women's, Misses', and Juniors' Blouses and Shirts
Leather and Sheep-Lined Clothing
Men's and Boys' Clothing, Not Elsewhere Classified
Men's and Boys' Shirts, Except Work Shirts
Men's and Boys' Suits, Coats, and Overcoats
Brassieres, Girdles, and Allied Garments
Curtains and Draperies
Knit Outerwear Mills
Women's, Misses', and Juniors' Suits, Skirts, and Coats
Rubber and Plastics Footwear
House Slippers
Men's Footwear, Except Athletic
Women's Footwear, Except Athletic

48.32%
24.33%
24.33%
24.33%
24.26%
24.22%
24.10%
23.73%
23.59%
23.51%
23.43%
23.13%
22.99%
22.75%
22.69%
22.20%
22.01%
22.01%
22.01%
22.01%

Industry description

Average
tariffs

35

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Fig. 1
Time trend of the percent of firms with dual leadership (i.e., the Chief Executive Officer (CEO) is the Chairman of
the Board of Directors (COB))
We obtain the percentage for the period of 1978-1983 from Rechner and Dalton (1991), who compile the
percentage based on 141 U.S. firms randomly selected from the Fortune 500 list. The percentage for the period of
1984-1991 comes from Yermack (1995), who compiles the percentage using 792 firms in Forbes magazines
rankings of the 500 largest U.S. public corporations. The percentage of 1993 comes from Dahya and Travlos (2000),
who obtain the percentage from Business Week International. The percentage of 1995 comes from Faleye (2007b),
who compiles the percentage based on 1,883 U.S. firms that filed proxy statements with the SEC in 1995 and met
the data requirement in his study. We compile the percentage for the period of 1996-2010 using all firms in
RiskMetric, which covers S&P1500 firms. The percentage of 1992 is the average of the percentages in 1991 and
1993. The percentage of 1994 is the average of the percentages in 1993 and 1995.

41

Fig. 2
Time trend of Tobins Q.
The graphs display time trends of median values of Tobins Q for firms with stable duality status of board
leadership (Duality firms) and firms with stable non-duality status of board leadership (Non-duality firms). We
define a firm as having a stable duality (non-duality) status, if the firm has a CEO (a director other than the CEO) as
the Chairman of the Board for more than 80% firm years for a minimum of four years from 1988 to 1998. Panel A
contains sample firms impacted by the 1989 trade liberalization. Panel B contains sample firms not impacted by the
trade liberalization.

42

Fig. 3.
Time trends of board leadership and board composition.
Figures A and B graph the time trends of the percentage of firms with the CEO as the Chairman of the Board
(ChairCEO) and the percent of non-executive directors (outsider) on the board for firms affected by the 1989
Canada-United States Free-Trade Agreement (FTA) and for firms not affected by the FTA, respectively. To be
included in the sample for the figures, the sample firm needs to have board data in 1988. There are 13,627 firm years
in the sample impacted by the FTA and 12,110 firm years in the sample not impacted by the FTA for the period of
1988-1998. Board data come from the SEC Compact Disclosure Database.

43

Table 1
Variable description.
This table describes the key variables used in the study.
Variable name
Main variables of interest
Dual

Tariff_import
Tariff_export
Tariff_rank

Tobin's Q

Key operating characteristics

Firm size
Return on assets (ROA)
Return on equity (ROE)
Past 3-year sales growth rate
Debt ratio
Volatility
R&D ratio
Ratio of advertising expense
Ratio of intangible assets
#Business segments
zCash
Sales per employee
Overhead expense
Input costs
Wage
Key governance variables
Board size
%Outsider
%D&O
%Institution_own

Variable description [computation presented using WRDS variable names]

Dummy variable that equals one if the firm has a stable duality status for 19881998, or equals zero if the firm has a stable non-duality status for 1988-1998. We
define a firm as having a stable duality (non-duality) status, if the firm has a CEO
(a director other than the CEO) as the Chairman of the Board (COB) for more than
80% firm years for a minimum of four years from 1988 to 1998.
The average U.S. tariff rates on Canadian imports in 1986-1988
The average Canadian tariff rates on U.S. exports in 1986-1988
Tariff rank. We assign a score of zero to a firm whose import tariff rate and export
tariff rate are zero; in other words, the firm is not affected by the 1989 FTA. We
rank firms with positive import tariff rates, and assign a score of two to a firm if it
has an above-average import tariff rate or a score of one if it has a below-average
import tariff rate. We assign the scores to firms with positive export tariff rates in
the same way. Tariff rank is the sum of the above-mentioned scores. Hence, the
maximum tariff rank is four with the minimum being zero.
Market value of common equity minus book value of common equity plus book
value of total assets, over book value of total assets; [(prcc_f*csho-ceq+at)/at]

Natural logarithm of total book assets; [ln(at)]

Earnings before interest, taxes, and depreciation (EBIT) over book value of total
assets; [(oiadp+dp(if not missing))/at]
EBIT over common equity; [(oiadp+dp(if not missing))/ceq]
Geometric mean of sales growth rates over the past three years;
[((salet/salet-1)*(salet-1/salet-2)*(salet-2/salet-3))1/3-1]
Long-term debt over total assets; [dltt/at]
Standard deviation of daily stock returns*the square root of 252, if the stock is
traded for at least a quarter of the year
R&D expenditure over sales; [xrd/sale]. xrd=0, if missing.
Advertising expense over sales; [xad/sale]
Intangible assets over total book assets; [intan/at], if negative then zero (one such
observation)
The number of business segments, in which the firm operates
The cash-to-assets ratio minus the industry-year mean, over the industry-year
standard deviation (Frsard, 2010); [the cash-to-asset ratio=(ch+ivst)/at]
Sales over total number of employees; [sale/(emp*1000)]
Selling, General and Administrative Expense over sales; [xsga/sale]
Costs of goods sold over sales; [cogs/sale]
Employee wage; [(xlr*1000)/emp]

Total number of directors on the board

Percent of non-executive directors on the board
Percent of director and officer ownership
Percent of institutional ownership

44

Table 2
Tariff rates in 1988.
This table presents the summary statistics of the import and export tariff rates for 1988. Import tariff data come
from Feenstra (1996). Export tariff data come from Trefler (2004). Tariff rates are aggregated from the commodity
level to the level of the four-digit Standard Industrial Classification (SIC) codes. To get firm-level tariff rates, we
first obtain segment sales and the four-digit SIC codes associated with each segment from the Compustat Segments
Database, then weigh the tariff rates at the level of the four-digit SIC codes by firms segment sales, and sum the
weighted rates. There are 1,384 firm-year observations in 1988. Tariff variables (i.e., tariff_import, tariff_export,
and tariff_rank) are as described in Table 1.
#Firms
%Firms
(N)
(=N/1,384)
When either tariff_import or tariff_export is positive
802
58%
Tariff_import
844
61%
Tariff_export
916
66%
Tariff_rank
When both tariff_import and tariff_export are positive
730
53%
Tariff_import
730
53%
Tariff_export
730
53%
Tariff_rank

Tariff rates
Median
Std. Dev.

#4-digit
SIC codes

Mean

201
231
237

1.72%
2.81%
1.71

0.37%
1.77%
2.00

2.84%
3.97%
1.41

195
195
195

3.16%
4.43%
2.88

3.10%
3.29%
3.00

3.25%
4.41%
0.75

45

Table 3
Sample description.
This table presents summary statistics of key operating and governance variables for the sample used in this
study. The sample is constructed from the intersection of Compustat North America (financial statement data),
Compustat Segments (segment sales), CRSP (stock price data), and the SEC Compact Disclosure Database
(governance data), excluding utilities and financial institutions. After meeting the necessary data requirement, the
final sample has 1,926 unique firms or 25,246 firm years from 1979 to 1998. Variables are as described in Table 1.
All operating variables are winsorized at the 1% level at both tails, except for Tobins Q, total assets, and the
number of business segments, which will be in natural logarithm form in regressions.

Tobin's Q
Total assets (in $millions)
#Business segments
ROA
ROE
Past 3-year sales growth rate
Debt ratio
Volatility
R&D ratio
Ratio of advertising expense
Ratio of intangible assets

N
25,246
25,246
25,244
25,246
24,635
25,246
25,246
25,246
25,246
9,343
21,157

Mean
1.66
1,706.36
1.81
7.08%
15.52%
13.51%
18.24%
52.79%
3.87%
3.41%
5.37%

Median
1.29
120.35
1.00
8.66%
19.59%
9.71%
15.09%
43.49%
0.00%
1.98%
0.59%

Std. Dev.
1.41
8,726.08
1.31
13.02%
37.79%
22.94%
16.73%
32.75%
12.80%
4.29%
9.96%

%Dual
Board size
%Outsider
%D&O
%Institution_own

25,246
21,738
21,738
19,484
20,275

63.99%
8.50
63.93%
21.42%
32.87%

100.00%
8.00
66.67%
15.07%
30.25%

48.00%
3.43
18.87%
20.38%
23.61%

46

Table 4
Impact of dual leadership on Tobins Q.
This table presents regression estimation of the impact of dual leadership on firm performance. See Table 1 for
variable definition and description. We estimate all models controlling for heteroskedasticity and firm-level
clustering. p-values are reported in parentheses below the coefficient estimates. a, b and c denote significance at the
1%, 5%, and 10% level, respectively.
Dep. var.= Ln(Tobins Q)
Dual*post89*tariff_import

(1)
1.721

(2)

(3)

(0.020)
Post89*tariff_import

-0.686
(0.322)

Dual*post89*tariff_export

1.320

(0.000)
Post89*tariff_export

-0.044
(0.897)

Dual*post89*tariff_rank

0.028
(0.002)
-0.006
(0.465)

Post89*tariff_rank
Firm size
ROA

-0.110
(0.000)

-0.110
(0.000)

-0.110
(0.000)

0.819

0.816

0.819

(0.000)
ROA t-1

0.139

(0.000)
a

(0.001)
ROA t-2

0.100

Debt ratio

0.279

0.097
0.278

0.138
0.098
0.278

(0.000)

(0.000)

-0.015

-0.017

-0.016

-0.108

(0.656)
-0.107

(0.668)
a

-0.107

(0.000)

(0.000)

(0.000)

Firm fixed effects

Yes

Yes

Yes

Year fixed effects

Yes

Yes

Yes

25,246

25,246

25,246

F -value

70.18

70.86

70.53

Adj. R-squared

0.646

0.647

0.646

#obs

(0.017)
a

(0.000)

(0.001)
b

(0.017)
a

(0.690)
Volatility

0.138

(0.000)
a

(0.001)
a

(0.014)
Past 3-year sales growth rate

47

Table 5
Impact of dual leadership on Tobins Q - Robustness check.
This table presents regression estimation of the impact of dual leadership on firm performance, controlling for
other operating and governance characteristics. See Table 1 for variable definition and description. We estimate all
models controlling for heteroskedasticity and firm-level clustering. p-values are reported in parentheses below the
coefficient estimates. a, b and c denote significance at the 1%, 5%, and 10% level, respectively.
Dep. var.= Ln(Tobins Q)

Tariff=tariff_import
(1)

Dual*post89*tariff

2.369

(2)
a

(0.003)
Post89*tariff

-1.286

(0.088)
Firm size

-0.104
0.782

ROA t-2

0.118

Debt ratio

%outsider

(0.000)

-0.993

0.093

0.070

-0.010

-0.003

-0.101

(0.807)
a

0.982
0.155

(0.000)
a

0.113

-0.100

(0.293)
a

(0.000)
a

0.975

(0.000)
a

(0.000)
b

0.152

-0.104
0.780
0.115

-0.100
0.984
0.154

0.004

0.056

-0.007

0.060

-0.001

(0.949)
a

0.298

(0.213)
a

0.301

(0.903)
a

0.295

(0.186)
a

0.300

0.292

(0.000)

(0.000)

(0.000)

(0.000)

(0.000)

-0.027

-0.026

-0.029

-0.026

-0.028

-0.025

-0.107

(0.573)

-0.039
0.012

-0.058

(0.476)
b

(0.044)
c

-0.042

(0.000)
c

(0.098)
c

0.013

-0.107

(0.573)
a

-0.041

(0.052)
c

(0.057)
c

(0.081)

0.012
(0.058)

-0.055

(0.496)
b

-0.045
0.013

-0.037

(0.063)

0.012
(0.051)

-0.053
-0.037
(0.150)

0.014

-0.049

-0.044

(0.200)

(0.216)

(0.265)

-0.011

-0.013

-0.011

-0.110

(0.801)

0.212
(0.000)

-0.112

(0.834)
c

(0.066)
a

0.208
(0.000)

(0.048)

-0.051

(0.063)
c

(0.094)
c

(0.585)
a

(0.000)
c

(0.077)
c

-0.106

(0.985)
a

(0.000)

(0.000)
a

0.062
0.302

(0.000)
a

(0.000)
a

(0.799)
a

(0.014)

(0.068)
%Institution_own

0.777
(0.000)

(0.834)
%D&O

-0.104

(0.893)
a

(0.014)

(0.067)
Log(board size)

(0.000)

(0.015)

(0.076)
z Cash t-1

(0.002)

(0.016)

(0.000)
Ln(#business segments)

0.043

(0.013)

(0.511)
Volatility

0.037

(6)
a

(0.012)
(0.172)
Past 3-year sales growth rate

1.699

(5)
a

(0.000)

(0.000)
a

1.486

(4)
a

(0.020)

(0.000)
a

(0.000)
ROA t-1

(3)
b

(0.306)
a

(0.000)
ROA

2.344

Tariff=tariff_rank

Tariff=tariff_export

-0.119

(0.046)
a

0.210

(0.000)

48

Table 5 contd
Firm fixed effects

Yes

Yes

Yes

Yes

Yes

Yes

Year fixed effects

Yes

Yes

Yes

Yes

Yes

Yes

21,343

15,364

21,343

15,364

21,343

15,364

F -value

51.58

36.75

52.01

37.16

52.02

37.10

Adj. R-squared

0.650

0.682

0.652

0.684

0.651

0.683

#obs

49

Table 6
Impact of dual leadership on ROA and ROE.
This table presents regression estimation of the impact of dual leadership on ROA and ROE. See Table 1 for
variable definition and description. We estimate all models controlling for heteroskedasticity and firm-level
clustering. p-values are reported in parentheses below the coefficient estimates. a, b and c denote significance at the
1%, 5%, and 10% level, respectively.
Dep. var.= Ln(Tobins Q)

Dual*post89*tariff

ROE

ROA

ROE

ROA

ROE

(1)

(2)

(3)

(4)

(5)

(6)

-0.001

0.010

-0.250
0.277

(0.092)
Firm size

0.012
0.113
(0.000)

Debt ratio

-0.091
-0.057

0.420

(0.821)

(0.766)

(0.052)

(0.666)

(0.044)

0.269

0.033

-0.135

0.002

0.001

0.029

(0.645)
a

0.264

0.012
0.113

0.050

-0.091
(0.000)
a

-0.056

0.029

(0.402)
a

(0.001)
a

(0.000)

(0.250)
-0.141

(0.495)
a

(0.000)
a

(0.000)
a

(0.000)
Volatility

0.023

(0.001)
a

0.092

(0.469)
a

(0.000)
Past 3-year sales growth rate

Tariff=tariff_rank

ROA

(0.139)
Post89*tariff

Tariff=tariff_export

Tariff=tariff_import

0.264

0.113

0.049

-0.091
(0.000)
a

-0.056

0.029
0.263

(0.000)
a

0.048
(0.269)

-0.140

(0.000)

(0.000)

(0.000)

(0.000)

(0.000)

(0.000)

Firm fixed effects

Yes

Yes

Yes

Yes

Yes

Yes

Year fixed effects

Yes

Yes

Yes

Yes

Yes

Yes

#obs

(0.001)
a

(0.000)

(0.263)
-0.140

(0.843)
a

(0.000)
a

(0.000)
a

0.012

25,246

24,555

25,246

24,555

25,246

24,555

F -value

37.77

23.39

37.81

23.79

37.68

23.72

Adj. R-squared

0.574

0.440

0.574

0.441

0.573

0.441

50

Table 7
Impact of dual leadership on Tobins Q, partitioned by the level of information costs.
This table presents regression estimation of the impact of dual leadership on firm performance. High or
Low indicates that the regression includes firms with above or below mean values of the corresponding variable in
1988. The mean value of the R&D ratio in 1988 is 3.69%. The mean value of the ratio of advertising expense is
3.40%. The mean value of the ratio of intangible assets is 4.79%. See Table 1 for variable definition and
description. We estimate all models controlling for heteroskedasticity and firm-level clustering. p-values are
reported in parentheses below the coefficient estimates. a, b and c denote significance at the 1%, 5%, and 10% level,
respectively.
Dep. var.= Ln(Tobins Q)

Dual*post89*tariff_rank
Post89*tariff_rank
Firm size

R&D ratio
(1)
High

ROA

ROA t-2

Debt ratio

Firm fixed effects

Year fixed effects

-0.004

0.018

-0.025

(0.675)

(0.450)

(0.063)

(0.572)

0.797

-0.073
0.898
0.280

(0.601)

(0.000)

0.086

0.199
0.194

-0.111
0.650

0.278
0.325

(0.000)

(0.000)

0.008

0.002

-0.271

(0.961)
a

-0.065

-0.209

0.114

0.332

-0.006
(0.542)

-0.112

0.885
0.241
0.164
0.180

-0.084
0.815
0.198
0.159

(0.004)
a

0.292

(0.001)

(0.000)

-0.076

0.018

(0.344)
-0.099

(0.000)
c

-0.035
c

(0.000)
b

(0.000)

-0.063

(0.000)
a

(0.081)
a

(0.624)
a

-0.008
(0.700)

(0.037)
c

0.015
(0.171)

(0.000)
c

(0.094)
a

(0.000)
a

(0.084)
b

(0.027)
b

0.978
0.151

(0.050)
a

(0.000)

(0.518)
a

-0.096

(0.000)
a

0.073

(0.000)

-0.191

(0.000)
a

(0.000)
a

0.077

(0.004)
a

(0.000)

-0.044

0.414

(0.000)
a

(0.935)
Volatility

(0.025)

0.011

(0.313)
Past 3-year sales growth rate

(0.195)

(0.006)

(0.000)
ROA t-1

(0.003)

(0.187)

(0.000)

0.044

0.028

Ratio of intangible assets

(5)
(6)
High
Low

0.019

0.022

-0.161

Ratio of advertising expense

(3)
(4)
High
Low

(2)
Low

(0.747)
c

-0.077

(0.000)

(0.016)

(0.001)

(0.099)

(0.077)

(0.009)

Yes

Yes

Yes

Yes

Yes

Yes

Yes

Yes

Yes

Yes

Yes

Yes

#obs

4,865

16,689

2,482

6,781

4,766

13,321

F -value

22.92

54.00

14.93

23.24

21.92

38.84

Adj. R-squared

0.624

0.608

0.715

0.677

0.605

0.634

51

Table 8
Impact of dual leadership on Tobins Q, partitioned by governance strength.
This table presents regression estimation of the impact of dual leadership on firm performance. High or Low
indicates that the regression includes firms with above or below mean values of the corresponding variable in 1988.
The mean value of %institutional ownership in 1988 is 27.64%. The mean value of %Block institutional ownership
is 7.00%. The mean value of %Top 5 institutional ownership is 14.99%. See Table 1 for variable definition and
description. We estimate all models controlling for heteroskedasticity and firm-level clustering. p-values are
reported in parentheses below the coefficient estimates. a, b and c denote significance at the 1%, 5%, and 10% level,
respectively.
Dep. var.= Ln(Tobins Q)

Dual*post89*tariff_rank
Post89*tariff_rank

%Institutional ownership
(1)
(2)
High
Low
a

0.023

(0.025)

(0.049)

(0.016)

(0.098)

0.003

-0.015

0.003

-0.018

0.010

-0.096
1.796
0.257
0.417
0.307
(0.000)

Debt ratio

(0.932)
(0.799)
a

-0.074

(0.270)
a

(0.000)
a

0.833
0.171
0.159
0.259

1.283
0.227
0.317

(0.000)

0.294
(0.000)

(0.112)
a

1.001
0.216
0.230
0.268

0.222
0.319

(0.000)

0.328
(0.000)

0.844
0.181
0.205
0.244

(0.000)

-0.038

0.003

-0.049

-0.037

-0.026

(0.564)

(0.960)

(0.439)

(0.539)

(0.705)

0.036

-0.085

0.017

-0.100

0.009

-0.104

(0.536)

(0.019)

(0.694)

(0.011)

(0.844)

(0.009)

Firm fixed effects

Yes

Yes

Yes

Yes

Yes

Yes

Year fixed effects

Yes

Yes

Yes

Yes

Yes

Yes

#obs

7,996

8,222

6,491

9,727

8,026

8,192

F -value

49.29

24.47

20.15

32.65

44.39

25.32

Adj. R-squared

0.722

0.638

0.669

0.667

0.681

0.688

(0.004)
a

-0.018

(0.018)
a

(0.780)
Volatility

(0.000)
a

(0.000)
a

-0.081
(0.000)

(0.005)
a

(0.001)
a

1.518

(0.452)
a

(0.000)
a

(0.004)
a

-0.096
(0.000)

(0.000)
a

(0.000)
a

-0.076
(0.000)

(0.006)
b

(0.016)
a

(0.791)
a

(0.000)
a

(0.013)
a

-0.120
(0.000)

(0.000)
a

(0.000)
Past 3-year sales growth rate

0.029

-0.013

(0.007)
ROA t-2

(0.002)

(0.000)
ROA t-1

0.025

0.031

(0.000)
ROA

%Top 5 institutional ownership

(5)
(6)
High
Low

0.001

0.038

(0.261)
Firm size

%Block institutional ownership

(3)
(4)
High
Low

52

Table 9
Impact of dual leadership, after adding the potential effect of efficiency gains due to increased competition.
This table presents regression estimation of the impact of dual leadership on firm performance, after adding the
potential effect of efficiency gains due to increased competition. See Table 1 for variable definition and description.
We estimate all models controlling for heteroskedasticity and firm-level clustering. p-values are reported in
parentheses below the coefficient estimates. a, b and c denote significance at the 1%, 5%, and 10% level,
respectively.

Dependent variable =
Sloth =

Dual*post89*tariff_rank

Ln(Tobins Q )
Overhead
Input
expense
costs
(2)
(3)

Sales per
employee
(1)
0.026

(0.003)
Post89*tariff_rank

-0.022

(0.002)
b

(0.034)
Sloth*post89*tariff_rank

0.112

(0.003)
Sloth*post89
Sloth

-0.095

Debt ratio

1.027

(0.009)

0.191
0.073
0.702

0.158

-0.078
1.194
0.218
0.094
0.498

0.965

0.200

-0.097
-0.102
1.062
0.431
(0.024)

0.064

0.066
-0.152

(0.000)

(0.763)

0.014

0.024

0.010

-0.173

-0.113

-0.102

(0.793)
a

-0.124

(0.238)
a

0.001

(0.000)

(0.000)

(0.000)

(0.992)

Firm fixed effects

Yes

Yes

Yes

Yes

Year fixed effects

Yes

Yes

Yes

Yes

24,857

23,330

25,246

2,682

F -value

61.19

57.03

61.41

17.21

Adj. R-squared

0.643

0.633

0.640

0.695

#obs

(0.684)
a

(0.005)
(0.532)

(0.000)
a

(0.000)

(0.025)
a

(0.000)

0.722

(0.091)
a

(0.144)
a

0.004
(0.916)

(0.000)
a

-0.003
(0.906)

(0.000)
a

(0.035)
a

-0.097

0.048
(0.852)

(0.039)
a

(0.000)
c

-0.126

0.005
(0.834)

(0.024)
a

(0.000)
a

(0.721)
Volatility

(0.542)

(0.000)
a

(0.093)
R&D ratio

-0.088

(0.000)
a

(0.000)
ROA t-2

0.026

0.486

(0.000)
ROA t-1

(0.023)

(0.162)

(0.000)
ROA

(0.591)

(0.587)

(4)
a

(0.002)
0.053

-0.147

-0.031

0.026

-0.007

-0.047

(0.787)
Firm size

0.027

Ln(Wage)

53

Table 10
Corporate failure rates.
This table presents corporate failure rates partitioned by whether a firm is affected by the 1989 FTA (i.e.,
tariff_rank>0 or tariff_rank=0). Panel A presents corporate failure rates from 1988 to 1998, because to study the
impact of the 1989 FTA we require sample firms to have Compustat data in 1988. We compile corporate failure
rates using Compustat and CRSP. Specifically, we first identify our sample firms that file for Chapter 7 or Chapter
11 using the Compustat data item, STALT. We find 42 unique firms. We then verify Compustat bankruptcy
records against CRSP delisting data, namely whether CRSP data item HDLRSN is coded 02 or 03. We treat a
delisting firm as failed if the gap between the delisting date in CRSP and the date of the last financial statement in
Compustat is less than or equal to four years. We identify an additional 83 unique bankrupt firms using this process.
Panel B reports corporate failure rates using data from a proprietary bankruptcy database, which contains all
bankruptcies filed by U.S. publicly traded firms and the bankruptcy filing dates from 1991 to 1998. We obtain the
data from Lemmon, Ma, and Tashjian (2009). a, b and c denote significance at the 1%, 5%, and 10% level,
respectively.
Panel A: Using Compustat and CRSP
Impacted by the 1989 FTA
Duality firms
Non-duality firms
Total Bankrupt
Total Bankrupt
(%)
(%)
firms
firms
firms
firms
1988
575
3
341
1
1989
617
381
1
1990
646
1
410
2
1991
678
437
7
1992
668
5
424
2
1993
652
5
407
2
1994
629
5
384
1
1995
610
361
2
1996
586
4
336
1997
550
2
313
4
1998
506
2
284
3
1989-1998 6,142
24 0.39%
3,737
24 0.64%

Not impacted by the 1989 FTA

Duality firms
Non-duality firms
Total Bankrupt
Total Bankrupt
(%)
(%)
firms
firms
firms
firms
311
1
157
355
188
371
208
1
389
8
223
8
395
4
237
6
392
6
227
1
386
2
223
3
369
2
215
4
344
3
197
5
313
11
175
4
271
3
142
1
3,585
39 1.09%
2,035
33 1.62%

Chi-Square test on failure rates between duality and non-duality firms, 1990-1998
Chi-Square value
Chi-Square value p -value
2.82
0.09
Continuity Adjusted Chi-Square value p -value
2.42
0.12

p -value

2.50
0.11
Continuity Adjusted Chi-Square value p -value
0.20
0.15

54

Panel B: Using a proprietary bankruptcy database

Impacted by the 1989 FTA
Non-duality firms
Duality firms
Total Bankrupt
Total Bankrupt
(%)
(%)
firms
firms
firms
firms
1991
1992
1993
1994
1995
1996
1997
1998
1991-1998

678
668
652
629
610
586
550
506
4,879

3
7
3
2
6
2
3
26 0.53%

437
424
407
384
361
336
313
284
2,946

3
2
4
1
1
1
5
17 0.58%

Not impacted by the 1989 FTA

Duality firms
Non-duality firms
Total Bankrupt
Total Bankrupt
(%)
(%)
firms
firms
firms
firms
389
395
392
386
369
344
313
271
2,859

7
7
5
1
3
1
4
8
36 1.26%

223
237
227
223
215
197
175
142
1,639

8
3
2
2
3
5
1
3
27 1.65%

Chi-Square test on failure rates between duality and non-duality firms, 1991-1998
Chi-Square value p -value
Chi-Square value p -value
1.14
0.29
0.07
0.80
Continuity Adjusted Chi-Square value p -value
Continuity Adjusted Chi-Square value p -value
0.87
0.35
0.01
0.92

55

Table 11
Event study results.
Panel A describes the key event dates during the negotiation of the 1989 Canada-United States Free Trade
Agreement (FTA). We identify the events by searching Lexis Nexis Academic and based on Thompson (1993).
Panel B presents the long-run event study results using the methodology in Chhaochharia and Grinstein (2007) and
Wintoki (2007). Annualized alpha is the annualized excess portfolio returns (p) from the four-factor model: Rpt-Rft
=p + 1(Rmt- Rft) + 2SMBt + 3HMLt + 4MOMt + it. (Rmt-Rft) is the market excess return. SMBt is the differences in
returns between portfolios of small and large stocks. HMLt is the differences in returns between portfolios of high
and low book-to-market stocks. MOMt is the momentum factor that measures the differences in returns between
portfolios of high- and low- return stocks in the past year. (Rmt-Rft), SMBt, and HMLt are based on Fama and French
(1993). MOMt is based on Carhart (1997). Rft is the risk-free rate. Rpt is the equally weighted portfolio of duality
firms or non-duality firms that are affected by the 1989 FTA.
Panel A: Key event dates
Dates
Events
9/23/1987 Negotiations on the Canada-United States Free-Trade Agreement (FTA) were discontinued
9/30/1987 It was announced at midnight that the possibility of resuming negotiations would be
discussed
10/3/1987 Substantive negotiations conclude and agreement is reached
1/2/1988 The Canadian Prime Minister Mulroney and the U.S. President Reagan signed the FTA
subject to the FTA being ratified by the U.S. and Canadian legislature within the 1988
calendar year
U.S. Reaction to the FTA
7/26/1988 Representatives Foley and Michel introduced H.R. 5090, a Bill to implement the FTA,
in the U.S. House of Representatives
8/9/1988 The House passed the Bill by a vote of 366 to 40
9/9/1988

The Senate passed the Bill by a vote of 83 to 9

Canadian Reaction to the FTA

7/20/1988 Liberal party leader Turner announced that the Liberal-dominated Senate would delay its
approval of the FTA implementing legislation until Mulroney called a national election
10/1/1988 Mulroney dissolved Parliament and announced a general election to be held on Nov. 21 in a
bid to save the FTA
11/7/1988 Gallup Poll: the Liberal party had a ten percentage point lead
11/10/1988 Globe-Environomics Poll: Liberal and Conservative parties were tied
11/21/1988 Mulroney won the election with a 43.7% popular vote
1/1/1989

The FTA came into effect

56

Panel B: Event-period alpha (p) from the four-factor model

Annualized Alpha
Event period
Duality firms
Non-duality firms
9/15/1987-11/30/88
9.57%
12.64%
10/1/1987-11/30/88

9.95%

12.92%

1/1/1988-11/30/88

8.10%

12.48%

7/15/1988-11/30/88

1.88%

3.28%

dif.
[t-value]
-3.07%
[-0.77]
-2.97%
[-0.73]
-4.37%
[-0.95]
-1.40%
[-0.21]

57