Force-Fields, Risk-Taking, and Termination Pay : Severance's Barrier to Internal Governance

CEOs are insured that they will not be terminated frivolously when they expect to be given severance because it becomes expensive for the board to terminate the CEO. Because severance makes termination initially costly, CEOs can create barriers to internal governance by making it even more costly or undesirable to replace them at any time. To erect these barriers, I find that CEOs reduce cash levels, increase capital expenditure, decrease financial flexibility, increase managerial specific investment, and tend to overpay for acquisitions. Additionally, once a CEO has constructed a barrier they can shirk responsibilities and overtime entrench themselves in the firm. These barriers help to explain why boards are slow to terminate underperforming CEOs