dahya et al - 2009 - one man two hats- what's all the commotion

The Financial Review 44 (2009) 179 212
One Man Two Hats: What’s All
the Commotion!
Jay Dahya
∗
Baruch College, CUNY
Laura Galguera Garcia
University of Oviedo
Jos van Bommel
University of Oxford
Abstract
We examine performance in publicly listed U.K. companies over a period that encom-
passes the issuance of the Cadbury Committee’s Code of Best Practice, which calls for the
abolition of the combined CEO/COB position. We find that companies splitting the combined
CEO/COB position to conform to the Code’s requirement did not exhibit any absolute or rel-
ative improvement in performance when compared to various peer-group benchmarks. We do
not necessarily scoff at mandated board structures, but the evidence suggests that this particular
legislature coerced the abandonment of the combined CEO/COB position and appears to be
wide of the mark.
Keywords: Cadbury, CEO, directors, governance, UK
JEL Classifications: G28, G30, G34
∗
Corresponding author: Baruch College, City University of New York, One Bernard Baruch Way,
Box B10-225, New York, NY 10010-5585; Phone: (646) 312-3511; Fax: (646) 312-3451; E-mail:

We appreciate assistance in compiling the data from Companies House U.K., Lloyds Share Registration
Services, Hemmington Scott, and the Subotnick Financial Services Center. This paper has benefited from
the helpfulcommentsofLinda Allen,DavidDenis, Diane Denis, JackFrancis, Joanne Li, ColinMayer, John
McConnell, and seminar participants at Baruch College, Queen’s University, Belfast, and FMA European
Meetings 2005. Jay Dahya acknowledges financial support from the Baruch College Fund, INQUIRE-UK,
and the Eugene M. Lang Junior Faculty Fellowship.

C
2009, The Eastern Finance Association 179
180 J. Dahya et al./The Financial Review 44 (2009) 179–212
Traditionally, the top executive position on the boards of directors of publicly
traded corporations around the world has been held by a single individual holding
the title of joint chief executive officer (CEO) and chairman of the board (COB).
For example, in 1990, the positions of CEO and COB were combined for 372 of the
Fortune 500 firms (i.e., 74.4% of the firms). Similarly, in 1990, of the largest 25% of
firms (ranked by market capitalization) listed on the stock exchanges of the United
Kingdom, France, Australia, Belgium, Canada, Japan, Italy, India, and Brazil, the
titles of CEO and COB were combined in more than 60% of the listed firms in each
country.
During the 1990s and beyond, publicly traded corporations worldwide have
experienced increased pressure to separate the combined position of CEO and COB
so two different individualswould maintain the titles ofCEO andCOB. Between 1992
and 2004, at least 16 countries have witnessed the publication of reports sponsored
by their governments, or sometimes by their major stock exchanges, advocating that
two different individuals hold the positions of CEO and COB.
1
The new standard
typically requires a major overhaul in the leadership structure on corporate boards.
As far as the United States is concerned, the recommendation has shown up in the
Sarbanes-Oxley Act and has garnered much publicity. For all the aforementioned
countries, the proposal has been implemented with a sense of urgency, with little
evidence to indicate that its adoption would actually prove beneficial.
Arguably, the global movement toward the separation of the combined chairman
and CEO position can be traced back to the Committee on the Financial Aspects of
Corporate Governance, commonly referred to as the Cadbury Report, in the United
Kingdom in 1992. The Cadbury Committee Report recommended that the positions
of CEO and COB in U.K listed companies be held by two different individuals.

Compliance of this key recommendation required U.K. companies to make notewor-
thy changes. In 1988, for example, 63.6% of the Financial Times (FT) 500 and 57.6%
of all London Stock Exchange (LSE) companies had the positions of CEO and COB
held by the same individual. By 2000, 9.8% of the FT 500 and 22.8% of all LSE-listed
companies had the posts of CEO and COB held by a single person. An underlying
presumption of this movement is that boards with different individuals holding the
positions of CEO and COB will significantly improve the quality of board monitoring
and as a result lead to better corporate performance. However, in large measure, this
presumption lacks empirical support.
Various studies show that combining the positions neither improves nor destroys
corporate performance (Berg and Smith, 1978; Chaganti, Mahajan and Sharma, 1985;
Baliga, Moyer and Rao, 1996; Brickley, Coles and Jarrell, 1997; Daly and Dalton,
1997; Palmon and Wald, 2002). There are several explanations as to why prior stud-
ies might fail to find a convincing relationship, if one exists. First, firms tend to
1
The countries include Australia, Belgium, Brazil, Canada, Cyprus, Czech Republic, France, Greece,
India, Japan, Kenya, Kyrgyz Republic, Malaysia, Singapore, South Africa, and the United Kingdom.
J. Dahya et al./The Financial Review 44 (2009) 179–212 181
combine the positions of CEO and COB during top executive succession events.
Disentangling the effects of executive succession from the effects of combining the
positions of CEO and COB has proved to be a significant challenge (Brickley, Coles
and Jarrell, 1997). Second, the variables themselves may be endogenous. That is, if
combining the positions of CEO and COB does affect corporate performance, then
when every top executive position is at its optimum configuration, there will be no
relation to observe in the cross-section between the combined position of CEO/COB
and performance.
2
Finally, prior studies have focused primarily on U.S. companies,
and most U.S. companies continue to combine the positions. Thus, it is difficult to
find corporate boards that do not combine the positions to serve as a control group.

In this study, we investigate further the relation between combining the posi-
tions of CEO and COB and corporate performance over the years surrounding the
issuance of the Cadbury Report (in December 1992) in the United Kingdom. By using
U.K. firms in our analysis, we hope to alleviate some of the shortcomings attributed
to studies conducted with U.S. data. First, because corporate boards were pressured
(through a government-sponsored mandate) to separate the combined positions of
CEO and COB, the effects of CEO succession can be disentangled from the effects
of combining the positions. Second, it can be argued that the Cadbury recommenda-
tion represented an exogenous event that radically altered top executive leadership
structures in the United Kingdom. And, third, the aforementioned changes, as shown
in Figure 1, were concentrated over a relatively short time and the large sample of top
executive positions with altered structures provides a clean before- and after-event
analysis.
3
Additionally, exploring the adoption of this one key Cadbury recommen-
dation is interesting in its own right because many other countries appeared to have
modeled their corporate governance codes on the Cadbury Report. Because the Cad-
bury Report was one of the first of such national mandates, it has now been in effect
long enough that the impact on corporate performance, if any, can be observed. Thus,
this study can be thought of as a precursor of what might occur in other countries that
have adopted (or are contemplating adopting) similar guidelines.
The key question that we ask in this study is whether U.K. companies that
complied with the Cadbury recommendation, by separating the combined posi-
tion of CEO and COB, experienced an improvement in corporate performance.
We find that compliance is not associated with any (statistically or economically
2
The rationale for this explanation is drawn from studies by Bhagat and Black (2002) and Hermalin
and Weisbach (1991), among others, who report evidence consistent with endogeneity between board
composition and corporate performance.
3

Figure 1 presents the proportion of all publicly traded industrial companies that combined the positions
of CEO and COB on the LSE against those on the New York Stock Exchange (NYSE) from 1986 through
2000. As observed in Figure 1, the aftermath of the Cadbury Report witnessed widespread reduction in
the number of firms combing the positions of CEO and COB (from 72% to 20%). In comparison, the
proportion of firms combining the titles of CEO and COB for firms listed on the NYSE is essentially
unchanged (around 78% throughout).
182 J. Dahya et al./The Financial Review 44 (2009) 179–212
0.00
0.10
0.20
0.30
0.40
0.50
0.60
0.70
0.80
0.90
1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997
Year
Fraction of All Industrial Firms with a Combined
CEO and COB
UK - Combined CEO and COB
US - Combined CEO and COB
Figure 1
U.K. and U.S. industrial firms listed on the LSE and NYSE, respectively, combining the positions of CEO and COB over 1986–1997
The solid line is the set of firms on the NYSE, and the dashed line is the set of firms on the LSE that after December 1992 were coerced to separate the combined
CEO and COB position in order to be in compliance with the Cadbury Committee recommendation (the adopted-Cadbury firms). To determine which set to
classify a firm, we tracked the names of the persons holding the titles of CEO and COB each year for each British firm from the Stock Exchange Yearbook and
from Proxy Statements for each U.S. firm.
J. Dahya et al./The Financial Review 44 (2009) 179–212 183

significant) improvement in operating or stock price performance relative to bench-
mark companies.
Nonetheless, we recognize that our measure of operating performance may be
biased since all sample firms experience a drop in earnings over 1989–1992 and what
we observe is merely a natural mean reversion in earnings for a given benchmark
over this period. To address this concern, we recompute our performance measure
using a performance-matching method (Barber and Lyon, 1996). Against this more
robust benchmark, companies that adopted the recommendation experienced either
deterioration or no change in operating performance relative to benchmark companies
over the period of our analysis. As a further check on our performance measure,
we conduct our analysis using stock price in place of operating performance. The
results on stock returns show that separating the combined CEO and COB post is not
associated with any significant improvement in stock price performance relative to
benchmark companies. In sum, our analysis on the adoption of this one key item of the
Cadbury Report dashes hope that this feel-good factor will lead to global corporate
governance rapture.
As with any study of this nature, numerous caveats are in order. First, we do
not necessarily scoff at mandated top executive structures, but the evidence in this
study shows that such a mandate was not associated with any improvement in the
performance of U.K. companies. We also acknowledge the experience may be unique
to the United Kingdom or to the time period studied. Studies of other countries in
time will provide insight regarding the extent to which the findings from the U.K.
setting can be generalized.
1. Background
1.1. A first mover: The Cadbury Committee Report
Arguably, the global movement toward the separation of the combined CEO and
COB position can be traced back to the Cadbury Committee’s report on the financial
aspects of corporate governance issued in December 1992. The Cadbury Committee
was appointed by the Conservative Party government in the United Kingdom with
a broad directive to examine the financial aspects of corporate governance. The key

proposals of the Committee were contained in the Code of Best Practice, which
presents the committee’s recommendations on the structure and responsibilities of
corporate boards of directors in U.K. listed companies. Among other things, the
Code of Best Practice recommended the separation of the combined CEO and COB
position so two different individuals hold the positions of CEO and COB.
As of 2007, the Code has not been enacted into securities law, and compliance
with the Code is entirely voluntary. Nonetheless, the Code was heavily backed by the
LSE, which as of June 1993 has required a statement from each listed company on
whether the company is in compliance with the recommendations contained in the
Code. To gauge the significance of the Cadbury Report, it is imperative to appreciate
the circumstances surrounding its publication.TheCadburyCommittee was appointed
184 J. Dahya et al./The Financial Review 44 (2009) 179–212
following several corporate collapses of prominent FTSE companies over the late
1980s and early 1990s, including Maxwell Communications PLC and Colorol PLC,
among others. At its publication, those on both sides of the debate received the
Cadbury Code with a great degree of cynicism. On the one hand, there were those
who felt that legislation would be inevitabletoenforce the recommendations contained
in the Code. On the other hand, there were those who felt that the balance between
stockholders and senior management is best left to capital market forces.
1.2. Global movement toward separating the combined CEO
and COB position
The Cadbury Committee Report sparked global corporate governance frenzy.
Between the publication of the Cadbury Report in December 1992 and December
2002, at least 16 other countries witnessed publication of similar guidelines calling
for theseparation of the combined CEO and COB position. In the spiritof theCadbury
Report, in 1994, the Dey Report established guidelines for boards of publicly traded
Canadian corporations and the King Report purported similar rules for South African
corporations. In 1995, the Bosch Committee’s Report on Corporate Practices and
Conduct in Australia prescribed that two different individuals should hold the titles of
CEO and COB in publicly traded firms, and the Conseil National du Patronat Francais

in the Vienot Report, published in France, put forth similar recommendations.
From 1996 to 1999, five additional countries issued guidelines coercing corpora-
tions in Japan (Report of the Corporate Governance Forum of Japan, 1997), Belgium
(Cardon Report, 1998), Brazil (Report of the Instituto Braziliero de Governanca Cor-
porativa, 1999), Greece (Principles of Corporate Governance issued by the Greek
Capital Markets Commission, 1999), and India (Kumar Mangalam Report issued by
Securities and Exchange Board of India, 1999) to separate the combined position.
Since 2000, at least six more countries have promulgated guidelines in line with the
Cadbury recommendation. These include Cyprus (Cyprus Stock Exchange, 2003),
Czech Republic (Czech Securities Commission, 2001), Kenya (Private Sector Cor-
porate Governance Initiative sponsored by the Stock Exchange Committee, 2003),
Kyrzyg Republic (Securities Commission, 2002), Malaysia (Securities Commission
Malaysia, 2000), and Singapore (Council on Corporate Disclosure and Governance
established by the Securities Commission, 2001).
The generalpresumption underlying the global movement toward theeradication
of the combined CEO and COB position is that boards with two separate individu-
als holding the post would facilitate an independent check on the behavior of the
CEO and more importantly improve the overall quality of corporate monitoring and
performance.
1.3. Prior studies
Financial economists have devoted considerable effort on analyzing the link
between board composition and corporate performance. Studies on the topic fall
J. Dahya et al./The Financial Review 44 (2009) 179–212 185
into one of two categories: (1) those that examine the link between the fraction of
outside directors on the corporate board and corporate performance, and (2) those
that examine combining the CEO and COB positions and corporate performance.
The first category can be further subdivided into those that affect the way in which
boards accomplish discrete tasks and those that examine cross-sectional relations
between board composition and corporate performance.
4

Our review on the more
pertinent second category will be brief since Brickley, Coles, and Jarrell (1997),
Dahya and Travlos (2002), and Palmon and Wald (2002) provide a comprehensive
review of prior literature on the connection between combining the CEO and COB
positions and corporate performance.
Studies on the relation between combined titles and corporate performance, gen-
erally correlate various measures of corporate performance on whether the CEO and
COB positions are combined or not. For example, Brickley, Coles and Jarrell (1997)
study a sample of 661 large U.S. firms contained in the Forbes survey of executive
compensation in 1988. They perform a battery of tests including cross-sectional re-
gressions of performance, as measured by return on capital and stock returns, against
an indicator variable for a combined CEO and COB and various control variables.
With various regression specifications, they fail to report any statistically significant
relation between combined titles and corporate performance. The apparent conclu-
sion is that combining the CEO and COB positions in large U.S corporations is an
efficient set-up that preserves shareholder value.
Of course, Brickley, Coles and Jarrell (1997) is not the only study to analyze the
relation between combining the CEO and COB and corporate performance. Baliga,
Moyer and Rao (1996) compare operating performance among 181 industrial U.S.
firms that have changed the structure of the combined CEO and COB position. This
study fails to locate any operating performance changes surrounding changes in the
status of the combined CEO and COB position. Similarly, Berg and Smith (1978) and
Daly and Dalton (1997) analyze differences in the financial performance of those
companies combining the titles of CEO and COB versus those that do not. Both
studies fail to show any differences in performance for the two sets of firms and
conclude that combining the CEO and COB positions is indeed not a suboptimal
board configuration.
These findings appear to contrast with observations advanced by Jensen (1993)
and Hermalin and Weisbach (1991) who suggest that the combined position of CEO
4

Studies that explore how board composition affects the way in which boards accomplish discrete tasks,
such as responding to hostile takeovers, hiring and firing the CEO, and setting CEO compensation, include
Brickley, Coles and Terry (1994), Brickley and James (1987), Byrd and Hickman (1992), Core, Holthausen
and Larcker (1999), Cotter, Shivdasani and Zenner (1997), Franks and Mayer (1996), Shivdasani (1993),
among others. Whereas, Agrawal and Knoeber (1996), Bhagat and Black (2002), Dahya and McConnell
(2007), Dahya, Dimitrov and McConnell (2008), Coles, Daniel and Naveen (2008), Boone, Field, Karpoff
and Raheja (2007), Denis and Sarin (1999), Hermalin and Weisbach (1991), Kaplan and Reishus (1990),
Mehran (1995), and Yermack (1996) explore the cross-sectional relation between board composition and
corporate performance.
186 J. Dahya et al./The Financial Review 44 (2009) 179–212
and COB, among other things, lessens the monitoring ability of the corporate board.
Consistent with these observations, Palmon and Wald (2002) argue that the widely
reported absence of a relation between leadershipstructure and firm performance may
be due to the neglect of firm size as an important explanatory variable. Specifically,
they hypothesize that small firms benefit more from the clarity and decisiveness of
decision making under a single sure-footed executive, while large firms benefit more
from the checks and balancesassociated with a separation ofthe two functions.In their
empirical analysis, Palmon and Wald (2002) report a negative announcement period
stock return when small firms announce the switch from a combined CEO/COB to
separate functions on the Dow Jones Interactive Newswire and a positive announce-
ment effect when large firms undertake the same maneuver. Consistent with the
results reported by Palmon and Wald (2002) on large U.S. companies, Dahya, Lonie
and Power (1996), Dedman (2000), and Carapeto, Lasfer and Machera (2005) report
positive announcement returns to the separation of the unitary leadership structure for
various samples of large U.K. publicly traded companies from 1989 through 2003.
One obvious shortcoming with the studies on leadership structure and corporate
performance isthat thetwo variablesmay beendogenously determined(Hermalin and
Weisbach, 1998). If so, it could be that firms that are inclined to combine the CEO and
COB positions may also be more likely to display inferior (superior) performance.
If that is the case, the results observed in prior U.S. studies (a combined CEO/COB

position neither improves nor destroys corporate performance) and in contemporane-
ous U.K. studies (a positive stock price effect to leadership structure changes in large
firms) might indeed be spurious.
Because the CadburyReportspurred dramatic changesinthe board configuration
of U.K. companies, we are presented with a large sample of changes in the CEO/COB
position over a relatively short time, which provides an opportunity to alleviate en-
dogeneity, if any, and also limits the effects of top executive succession on corporate
performance. Against this backdrop and as the first mover in the global movement
toward the eradication of the combined CEO and COB position, this study explores
the separation of the combined CEO and COB position on corporate performance in
U.K. companies, in relation to the issuance of the Cadbury Report.
2. Sample and data sources
Our sample includes industrial companies listed on the LSE from 1989 through
1996. In the aggregate, 1,124 firms enter the analysis with at least one year of data
on top executive structure and certain financial information. To begin, we record the
name(s) of theCEO and COBfromthe board rosterin the StockExchangeYearbookin
each year for each firm from 1988 through 1996. This enables us to record CEO/COB
succession in each year from 1989 through 1996 for our sample firms. Since we are
only concerned with changes in the combined position of CEO and COB that are not
associated with CEO/COB succession, wescreen all CEO/COB successions unrelated
J. Dahya et al./The Financial Review 44 (2009) 179–212 187
Table 1
Descriptive statistics for U.K. industrial firms listed on the LSE, 1989–1996
Descriptive statistics on publicly traded U.K. industrial firms (with data on board composition and financial
information) from 1989 through 1996. In the aggregate, the sample includes 1,124 firms that enter the
analysis with at least one year of data. Accounting information and share prices are taken from Data-
stream. Board and equity ownership characteristics are taken from annual filings at Companies House and
supplemented with data from the Corporate Register and Stock Exchange Yearbooks from 1988 through
1996.
Year

Variable 1989 1990 1991 1992 1993 1994 1995 1996
Sample size 700 803 814 881 882 937 907 902
Joint CEO/COB (%) 56.29 54.05 51.84 50.40 43.20 39.70 37.60 33.48
Board size 6.90 7.10 7.30 7.30 7.90 8.00 8.10 8.20
Percentage of outside directors 0.30 0.32 0.33 0.34 0.41 0.44 0.47 0.48
CEO equity ownership (%) 2.52 2.64 3.13 4.80 5.29 5.15 5.50 5.66
Book value of assets (£m) 242.60 240.80 253.90 269.40 278.00 291.40 315.60 359.10
Market value of equity (£m) 246.00 239.50 259.40 278.50 317.10 314.20 336.90 361.50
to Cadbury compliance and remove them from further analysis.
5
In this way, we limit
our analysis to all changes in the combined CEO and COB position that do not stem
from CEO/COB succession.
For each firm in the sample, for each year 1989–1996, we also used the Stock
Exchange Yearbook, the Corporate Register, and annual filings maintained at Com-
panies House to determine the size of the corporate board, the number of outside
directors, the total number of shares held by the CEO, the total number of shares held
by board members, the total number of shares held by institutions, and the number
of block shareholders; a block shareholder is defined as any institutional shareholder
owning greater than three percent of the company’s common stock.
Summary statistics onthe combined positionofCEO and COB,outside directors,
book value of total assets, market value of equity and CEO, board and institutional
share ownership, along with the number of firms in the sample from 1989 through
1996 are presented in Table 1. The primary statistic of interest to us is the fraction
of firms that combined the positions of CEO and COB (Joint CEO/COB). Table 1
shows a marked decrease in the fraction of firms that combined the positions of CEO
and COB (Joint CEO/COB) from 56% in 1989 to 33% in 1996. The decrease in the
number of firms combining the titles of CEO and COB are concentrated in the years
5
We also require that a statement containing details of the (nonsuccession related) change in the top

executive leadership structure be filed with Companies House. In an effort to corroborate the Companies
House filings, we examine news articles in the Financial Times, Extel Weekly News Summaries and
Macarthy’s New Information Service. If data on the announcement of a separation in the combined CEO
and COB position is not available for a given firm, we directly liaise with the company to ascertain that
information, whenever possible.
188 J. Dahya et al./The Financial Review 44 (2009) 179–212
following the issuance of the Cadbury Report.
6
A similar marked increase in the
percentage of outside directors (from 30% to 48%) and board size (from 6.9 to 8.2)
is observed over the same time period. Table 1 also shows that the fraction of shares
owned by the CEO increased, on average, by 125% and the median market value of
equity and median book value of assets grew, on average, by 50% over the eight-year
interval.
For our analysis, we split the sample firms into four mutually exclusive groups:
(1) the set of firms for which two individuals maintain the titles of CEO and COB
every year in which they were listed on the LSE over the period 1989–1996 (we call
this the Always separated CEO and COB set, 318 firms); (2) the set of firms that
always combined the positions of CEO and COB (we call this the Always joined
CEO and COB set, 247 firms); (3) the set of firms that recently created the combined
position of CEO and COB (we call this the Created joint CEO and COB set, 169
firms); and (4) the remaining set of firms that comprises those that split the combined
position of CEO and COB, such that two individuals would hold the titles of CEO
and COB any year during the interval 1989–1996 (we call this the Adopted Cadbury
& separated joint CEO and COB set, 390 firms).
The summary statistics contained in Table 1 are expanded on in Table 2 for each
of the four sets of firms. Panel A is the Adopted Cadbury & separated joint CEO and
COB set,PanelBistheAlways separated CEO and COB set, Panel C is the Joined
CEO and COB set, and Panel D is the Created joint CEO and COB set. The average
firm in the “Adopted Cadbury & separated joint CEO and COB” set shows a marked

increase in board size from 6.6 members in 1989 to 8.3 members in 1996. A similar
increase in board membership is observed in Panels B and C for firms that always
separated the CEO/COB position (from 7.6 to 8.5 members) and for firms that always
joined the CEO/COB positions (from 5.5 to 6.8 members). The “Created joint CEO
and COB,” set in Panel D, exhibits a mild decrease from 6.4 to 5.7 members.
All four panels in Table 2 show an average increase of 5–15% in the fraction
of outside directors on the corporate board. Consistent with Dahya and McConnell
(2007), this increase can be ascribed to the widespread adoption of the other key
recommendation of the Cadbury Report that established a minimum representation
of outsiders on the board. This implies that in our multivariate analysis we should
control for the fraction of outside directors on the corporate board.
By definition, of course,the“Adopted Cadbury & separatedjointCEO and COB”
set will begin with a large proportion of companies combining the posts of CEO and
COB and will end up with zero by 1996. As might be expected, this statistic shows its
6
We acknowledge that the Cadbury recommendation cannot be held entirely accountable for the whole
decline. However, we have been meticulous to exclude all succession-related changes in the CEO/COB
position. To alleviate this concern further, we have plotted a line-of-best-fit using data on the number of
firms combining the positions of CEO and COB over 1989–1991 to estimate the proportion of firms with
a unitary leadership structure in the absence of a Cadbury-type recommendation by 1996. Our estimate
suggests that 50% of the firms, at most would combine the two posts.Theactualnumberof firms combining
the CEO and COB positions by 1996 was 33%—a staggering 17% lower than the linear estimate.
J. Dahya et al./The Financial Review 44 (2009) 179–212 189
Table 2
Board and financial statistics for U.K. industrial firms listed on the LSE, 1989–1996
Descriptive statistics on publicly traded U.K. industrial firms (with data on board composition and financial
information) from 1989–1996. In the aggregate, the sample includes 1,124 firms that enter the analysis with
at least one year of data. We split the sample into four mutually exclusive groups: (1) the set of firms that
separated the titles of CEO and COB in order to comply with the Cadbury Committee recommendation
listed on the LSE any year over the period 1989–1996 (the split CEO/COB titles set); (2) the set of firms

that maintained separate titles in all years in which they were listed over the period 1989–1996 (the always-
separate CEO/COB titles set), (3) the set of firms that never split the titles of CEO and COB any year in
which they were listed over the period 1989–1996 (the joint CEO/COB titles set); and (4) the remaining set of
firms which comprise those that joined separate CEO and COB titles to form a single post any year in which
they were listed over 1989–1996 (the create joint CEO/COB titles set). To determine how to classify a firm,
we identified the CEO and COB each year for each firm from the Stock Exchange Yearbook. Accounting
information and share prices are taken from Datastream. Return on assets (ROA) is calculated as earnings
before interest, taxes and depreciation divided by beginning-of-year total book value of assets.
Year
Variable 1989 1990 1991 1992 1993 1994 1995 1996
Panel A: Firms that adopted the Cadbury recommendation to separate the titles of CEO and COB
Sample size 236 272 273 293 300 330 311 335
Joint CEO/COB at year-end (%) 90.25 82.35 73.63 69.62 40.67 30.61 15.76 0.00
Board size 6.60 6.70 6.80 7.00 7.80 8.10 8.30 8.30
Percentage of outside directors 0.28 0.28 0.28 0.29 0.35 0.38 0.42 0.43
CEO equity ownership (%) 1.62 1.71 2.24 2.49 3.66 4.64 4.51 4.80
Book value of assets (
£m) 279.50 260.00 264.60 288.00 295.60 303.50 327.10 381.20
Market value of equity (
£m) 282.30 267.40 277.30 291.90 297.00 306.40 331.40 365.50
Panel B: Firms that always separated the titles of CEO and COB
Sample size 204 217 245 264 266 272 276 265
Board size 7.60 7.70 7.90 8.10 8.30 8.40 8.50 8.50
Percentage of outside directors 0.37 0.38 0.39 0.41 0.44 0.45 0.45 0.47
CEO equity ownership (%) 2.44 2.19 2.23 3.07 4.02 4.67 4.35 4.99
Book value of assets (
£m) 467.20 444.70 461.80 493.50 523.30 591.40 617.40 646.30
Market value of equity (
£m) 553.90 466.60 475.50 481.10 561.00 619.50 688.00 774.00
Panel C: Firms that always joined the titles of CEO and COB

Sample size 160 175 172 182 191 196 210 208
Board size 5.50 5.70 5.80 5.90 6.20 6.50 6.70 6.80
Percentage of outside directors 0.29 0.29 0.29 0.31 0.35 0.39 0.40 0.37
CEO equity ownership (%) 9.28 9.17 8.55 7.86 8.40 7.84 8.33 8.39
Book value of assets (
£m) 207.20 215.60 210.80 210.00 197.50 203.40 199.50 206.80
Market value of equity (
£m) 165.60 148.90 180.80 169.90 159.00 182.90 166.80 155.80
Panel D: Firms that created the joint title of CEO and COB
Sample size 100 139 124 142 125 139 110 94
Joint CEO/COB at year-end (%) 21.00 25.18 39.52 40.85 45.60 53.96 74.55 100.00
Board size 6.40 6.20 6.20 6.10 6.20 5.90 5.80 5.70
Percentage of outside directors (%) 0.16 0.17 0.18 0.20 0.20 0.20 0.19 0.21
CEO equity ownership 1.85 1.81 2.98 3.33 4.14 5.06 6.11 6.70
Book value of assets (£m) 85.20 89.10 86.40 90.20 88.90 95.40 93.90 89.40
Market value of equity (
£m) 61.00 64.10 66.20 82.70 80.50 78.40 81.30 91.90
190 J. Dahya et al./The Financial Review 44 (2009) 179–212
sharpest decline between year-end 1992 and 1993. This statistic continues to exhibit
a relatively sharp annual reduction throughout 1996. Yet again by construction, the
“Created joint CEO and COB” set will begin with a small proportion of companies
combining the posts of CEO and COB and will end up with all firms combining the
two titles by year-end 1996.
Table 2 also provides an overview of the fraction of shares owned by the CEO
for each of the four sets of firms. On average, the fraction of the company’s shares
owned by the CEO ranges between 1.8% and 9.9% for firms who have either always
joined the CEO and COB positions or have created the combined CEO and COB
position (Panels C and D, respectively). The same statistic ranges from 1.6% to 5.0%
for firms who have either adopted Cadbury and separated the combined CEO and
COB position or have always separated the titles of CEO and COB (Panels A and B,

respectively). Therefore, we also control for the fraction of shares owned by the CEO
(combined CEO and COB) in our multivariate analysis.
7
Finally, in terms of market value of equity and book value of assets, firms in
the “Adopted Cadbury & separated CEO and COB” set are similar in size to firms
that always joined the CEO and COB. In turn, these two sets of firms are smaller
than those in the “Always separated CEO and COB” set and larger than those in the
“Joined CEO and COB” set. Thus, we also control for firm size.
In our multivariate analysis, we employ accounting earnings to measure cor-
porate performance. We use return on assets (ROA) as the measure of accounting
earnings. For each sample firm for each year for which such data are available, we
calculate ROA as earnings before depreciation, interest, and taxes—all scaled by the
beginning-of-the year total book value of assets. Accounting data are taken from
Datastream each year for each firm from 1986 through 1999, where data are avail-
able. Because firms enter and exit the sample naturally, the number of firms differs
from year to year. Therefore, for any year where a firm has the requisite data, the
firm is included in the sample. We also identified each firm according to its Financial
Times Industry Classification (FTIC) to enable industry-matching of sample firms.
3. Analysis and results
3.1. ROA performance: An overview
As a first-pass analysis, Figure 2 presents an overview of the operating perfor-
mance of the four sets of firms from 1989 through 1996.
8
This figure shows the
7
The results in Table 2 on CEO equity ownership are consistent with those reported by Schmid and
Zimmermann (2007) in their analysis on leadership structure for a sample of Swiss firms. Specifically,
CEO ownership is smaller in firms separating the combined posts of CEO and COB (than in firms that
combined the two positions). It would appear that managerial equity ownership serves as a supplementary
check on potential entrenchment of the CEO/COB position and mitigates agency costs associated with a

combined role.
8
The statistic that we use for presenting our results is the trimmed mean of the distribution of ROAs where
the distribution is trimmed at the 1% and 99% level. Henceforth, we refer to this statistic as the mean of
the distribution.
J. Dahya et al./The Financial Review 44 (2009) 179–212 191
0.06
0.065
0.07
0.075
0.08
0.085
0.09
0.095
0.1
1989 1990 1991 1992 1993 1994 1995 1995
Year
Return on assets
Adopted-Cadbury
Always Separated Titles of CEO and COB
Combined Titles of CEO and COB
Created Combined CEO and COB Position
Figure 2
Trimmed mean ROA in calendar time for four mutually exclusive sets of U.K. industrial firms listed on the LSE over the period 1989–1996
The solid line represents the set of firms that came into compliance with the Cadbury Committee recommendation to separate the combined CEO and COB
position any time over the period 1989–1996. The dotted line represents firms that were always in compliance with the Cadbury recommendation and that match
the adopting firms on the basis of FTIC. The dashed line represents the set of firms that were never in compliance and that match the adopting firms on the
basis of FTIC. The dot-dashed line represents the set of firms that created the combined CEO and COB position anytime. To determine into which set to classify
a firm, we tracked the names of the persons holding the titles of CEO and COB each year for each firm from the Stock Exchange Yearbook over 1989–1996.
Accounting information is taken from Datastream. ROA is calculated as earnings before interest, taxes and depreciation divided by beginning-of-year total book

value of assets.
192 J. Dahya et al./The Financial Review 44 (2009) 179–212
mean ROA from 1989 through 1996 for the always joined and always separated CEO
and COB sets remains essentially the same. Firms combining the positions of CEO
and COB do not seem to perform any better or worse than firms that do not. For
example, the average ROA of the “Always joined CEO and COB” set (the dotted line)
starts out at the same point as the “Always separated CEO and COB” set (the dashed
line) and progressively moves above the line by 1996, while the average ROA of the
“Adopted Cadbury & separated joint CEO and COB” set (the solid line) ends below
the average ROA of the two aforementioned sets of firms (i.e., always joined and
always separated) by 1996.
Baliga, Moyer and Rao (1996) report that a combination of the CEO and COB
positions creates aclear-cut leadership roleand potentially morerapid implementation
of decisions, which translates into higher corporate performance. Presumably, such a
leadership structure is particularly important during times in which firms experience
financial hardship and are forced to restructure operations. Hence, the observation
that firms combining the separate posts of CEO and COB in Figure 2 experience
a substantial reduction in ROA (when compared to before the structure change) is
consistent with this conjecture. Moreover, the subsequent increase in ROA following
the switch to a unitary leadership structure suggests that under certain circumstances,
firms might profit from clear-cut leadership and sure-footed action that is associated
with a combined CEO/COB position.
At face value,Figure 2 indicates that adoption of the Cadbury recommendationis
not associated with any improvement in operating profitability relative to other firms.
Rather, the firms that adopted the Cadbury recommendation start on par in terms of
profitability in 1992 but end marginally below the “Always joined CEO and COB” set
of firms by 1996. In the remainder of this section, we explore the issue from various
perspectives with a battery of tests. Each of the tests supports the interpretation in
Figure 2: adoption of the Cadbury recommendation to split the combined titles of
CEO and COB does not improve corporate performance.

9
3.2. Changes in ROA with industry- and performance-matched benchmarks
(in event time)
Having examined the time series level of ROA performance, we now examine
changes in ROA from before to after the adoption for the “Adopted Cadbury &
separated CEO and COB” set of firms in comparison to various benchmarks. In the
analysis, the year in which a firm adopted the Cadbury recommendation and separated
the position is event year y. Year y + 1 is the year following event year y, and so forth.
We match firms from the three remaining subsets to year y as follows: for the subset
9
One important observation from Figure 2 warrants further explanation. All four sets of firms show a sharp
decline in ROA from 1989 through 1992 and a rebound from 1993 to 1996. This timeframe coincides with
the period of our analysis. In the next section, we check on whether the coincidental occurrence of these
events might explain the relation, if any, between combining the posts and corporate performance.
J. Dahya et al./The Financial Review 44 (2009) 179–212 193
that created the combined CEO/COB position, year y is when the change in leadership
was first announced; and for the two subsets that did not undergo any change in
the CEO/COB position, we match each firm in these subsets by the calendar year
represented by y for each firm in the subset adopting the Cadbury recommendation,
which results in some duplication of matches. In Figure 3, we present an overview of
the operating performance of the four sets of firms in event time over a seven-year
interval surrounding the adoption of the Cadbury recommendation. Univariate tests
of statistical significance are reported in Tables 3–6.
Figure 3 illustrates the mean ROA of the four sets of firms over a seven-year
interval centered on the year in which firms adopted the Cadbury recommendation.
10
In Figure 3, the mean ROA of the “Adopted Cadbury & separated CEO and COB”
firms increases slightly in the year after adoption and more dramatically in years y + 2
and y + 3. Table 3 (Panel B) shows that the increase is not statistically significant
(<0.05 level or less) over all three intervals (i.e., y − 1toy + 1, y − 1toy + 2, and

y − 1toy + 3). This confirms the trend in Figure 2 that adoption of the Cadbury
recommendation has little, if any, impact on operating performance. It is still plausible
that the modest increase in ROA is somehow biased due to macroeconomic factors
that have little to do with reconfiguring the combined CEO and COB position. For
example, the modest increase in ROA from y − 1 through y + 2 may be due to the
economy-wide uptick in corporate profitability over 1992–1996. If this is indeed the
case, then the actual effect of splitting the combined CEO and COB position might
actually result in a decrease in ROA.
To control for macroeconomic factors for each of the “Adopted Cadbury &
separated CEO and COB” firms, we identify all firms in the “Always separated CEO
and COB,”“Always joined CEO and COB, ” and the “Created Joint CEO and COB”
sets with the same FTIC in which the firm had an available ROA during any calendar
year over the adopting firm’s y − 1 through y + 3 interval. We then compute the
adopted-Cadbury firm’s industry-matched mean ROA for the three remaining sets of
firms for each year over the interval y − 1 through y + 3. The mean ROAs from
before to after y for the “Adopted Cadbury & separated CEO and COB” set and their
industry-matched always separated, always joined, and combined sets are presented
in Panel A of Table 3. The mean ROA from y − 1toy + 3 for the “Adopted Cadbury
& separated CEO/COB” set is essentially unchanged. (One notable exception is in
year y + 2 when ROA is 9.61%. We investigate this further when we discuss the
results in Panel B of Table 3.) From y − 1toy + 3, the industry-matched always
separated set (column D) and the industry-matched always joined set (column H)
exhibit an increase in absolute ROA of 0.58% and 0.83% from y − 1 through y + 3.
In comparison, the industry-matched combined set undergoes a drop in absolute ROA
of 0.10% (column L).
10
This set contains 820 firms in year y. The number of firms in year y − 1, y − 2, and y − 3 is 786, 751,
and 682, respectively; the number of firms in year y + 1, y + 2, and y + 3 is 885, 859, and 834.
194 J. Dahya et al./The Financial Review 44 (2009) 179–212
0.06

0.065
0.07
0.075
0.08
0.085
0.09
0.095
0.1
y-3 y-2 y-1 y y+1 y+2 y+3
Year
Return on assets
Adopted-Cadbury
Always Separated Titles of CEO and COB
Combined Titles of CEO and COB
Created Combined CEO and COB Position
Figure 3
Trimmed mean ROA in event time for four mutually exclusive sets of U.K. industrial firms listed on the LSE over the period 1989–1996
The solid line represents the set of firms that came into compliance with the Cadbury Committee recommendation to separate the combined CEO and COB
position any time over the period 1989–1996. Year y is the year in which these firms adopted the Cadbury recommendation. The dotted line represents firms that
were always in compliance with the Cadbury recommendation and that match the adopting firms on the basis of FTIC and ROA in year y − 1. The dashed line
represents the set of firms that were never in compliance and that match the adopting firms on the basis of FTIC and ROA in year y − 1. The dot-dashed line
represents the set of firms that created the combined CEO and COB position. To determine how to classify a firm, we tracked the names of the persons holding the
titles of CEO and COB each year for each firm from the Stock Exchange Yearbook from 1989 through 1996. Accounting information is taken from Datastream.
ROA is calculated as earnings before interest, taxes, and depreciation divided by beginning-of-year total book value of assets.
J. Dahya et al./The Financial Review 44 (2009) 179–212 195
Table 3
ROA and change in ROA for firms that always maintained separate titles for the CEO and COB and split the joint CEO/COB title on the LSE, 1989–1996
The sample includes 1,124 firms that enter the analysis with at least one year of data. We split the sample into four mutually exclusive groups: (1) the set of firms that separated the titles of CEO
and COB so as to come into compliance with the Cadbury Committee recommendation listed on the LSE any year over the period 1989–1996 (the split CEO/COB titles set), (2) the set of firms that
maintained separate titles in all years in which they were listed over the period 1989–1996 (the always-separate CEO/COB titles set), (3) the set of firms that never split the titles of CEO and COB

any year in which they were listed over the period 1989–1996 (the joint CEO/COB titles set), and (4) the remaining set of firms which comprise those that joined separate CEO and COB titles to
form a single post any year in which they were listed over 1989–1996 (the create joint CEO/COB titles set). To determine into which set to classify a firm, we identified the CEO and COB each year
for each firm from the Stock Exchange Yearbook. Accounting information to compute ROA is taken from Datastream. ROA is calculated as earnings before interest, taxes and depreciation divided
by the total book value of assets. Industry matching is based on FTIC. Performance matching is based on ROA in year y − 1.
Always- Create
Always- separate Joint Create joint
Split separate CEO/COB Joint CEO/COB joint CEO/COB
CEO/COB CEO/COB titles CEO/COB titles CEO/COB titles
titles titles industry- & titles industry- & titles industry- &
over industry- performance- industry- performance- industry- performance-
1989–1996 matched Difference matched Difference matched Difference matched Difference matched Difference matched Difference
Event Sample firms firms in means firms in means firms in means firms in means firms in means firms in means
year size (in %) (in %) (C – D) (in %) (C – F) (in %) (C – H) (in %) (C – J) (in %) (C – L) (in %) (C – N)
(A) (B) (C) (D) (E) (F) (G) (H) (I) (J) (K) (L) (M) (N) (O)
Panel A: Return on assets (mean ROA in percent)
y − 1 312 8.72 8.67 8.83 8.38 8.54 7.92 8.59
y 336 8.37 8.38 8.87 8.04 8.02 7.21 7.34
y + 1 358 8.74 9.25 9.04 8.55 8.77 7.89 8.00
y + 2 355 9.61 9.47 9.54 8.93 9.21 7.94 8.10
y + 3 290 8.91 9.25 9.31 9.21 9.59 7.82 8.03
Panel B: Change in return on assets (mean ROA in percent)
y − 1toy + 1 358 0.02 0.58 −0.56 0.21 −0.19 0.17 −0.15 0.23 −0.21 −0.03 0.05 −0.59 0.61
y − 1toy + 2 355 0.89 0.80 0.09 0.71 0.18 0.55 0.34 0.67 0.22 0.02 0.87 −0.49 1.38
b
y − 1toy + 3 290 0.19 0.58 −0.39 0.48 −0.29 0.83 −0.64 1.05 −0.86 −0.10 0.29 −0.56 0.75
a
and
b
indicate significance at the 0.01 and 0.05 level.
196 J. Dahya et al./The Financial Review 44 (2009) 179–212

Panel B of Table 3 provides tests of statistical significance from before to after
year y for the“Adopted Cadbury&separatedCEO/COB” set and theindustry-matched
alwaysseparated,alwaysjoined, and combined sets,respectively. Thechangesin ROA
from before to after y for the always joined and always separated sets are always larger
than the adopted-Cadbury/separated set. For example, the change in ROA from y − 1
to y + 3 is 0.19% for the adopted-Cadbury/separated set, and the change in ROA for
the always separated CEO and COB set is 0.48%. The change in ROA for the always
joined the CEO and COB set over the same interval is 0.83%. For the created the
combined CEO and COB set the changes in ROA are typically small and negative,
thus the changes in ROA from beforeto after yeary forthe adopted-Cadbury/separated
set is always greater than this benchmark set.
According tothe resultspresented inPanel B of Table 3, the change in status from
a single individual holding the title of joint CEO/COB to two different individuals
holding the titles of CEO and COB is not associated with any statistically significant
change in profitability when analyzed against various industry-matched benchmarks.
Nevertheless, it can be argued that the results are also consistent with mean reversion
in earnings, since all four sets of firms show a sharp decline in ROA from 1989
to 1992 and a rebound from 1993 to 1996. Barber and Lyon (1996) show that if
earnings are mean reverting and if sample companies have experienced especially
good (or especially poor) performance prior to the event under investigation, then
comparing to a simple industry-matched benchmark could be misleading. To rectify
this shortcoming, we generate three new sets of firms that match the adopting firm
on the basis of their FTIC and ROA in year y − 1. Specifically, for each adopting
firm, we identify all firms in the always separated set with the same FTIC as of year
y − 1. From these firms, we choose the firm whose ROA is closest to the ROA of the
adopted-Cadbury/separated firm in y − 1, as long as the matching company’sROA
lies within 70% and 130% of the adopting firm’s ROA. We then replicate the industry
and performance matching procedure for the two remaining sets of firms, the always
joined and the combined.
11

The mean ROAs of the adopted-Cadbury/separated firms along with the mean
ROAs of their industry- and performance-matched firms are also presented Table 3.
For every interval, the results using the industry- and performance-matching method-
ology (in columns F, J, and N) are indistinguishable to those utilizing the industry-
matching methodology (in columns D, H, and L). The evidence robustly shows that
adoption of the Cadbury recommendation does not lead to any absolute or relative
improvement in operating performance when compared to benchmark firms that al-
ways joined or always separated the positions of CEO and COB. In firms that created
the joint CEO and COB position, there is some evidence to the contrary though these
11
As might be expected, the number of firms is not constant each year and declines as we move away from
year y. It should also be noted that the number of firms that adopted the Cadbury recommendation exceeds
the number of firms in the three matching sets of firms in each year over y − 1 through y + 3, therefore
some of the matching firms enter the analysis more than once, albeit typically in a different calendar year.
J. Dahya et al./The Financial Review 44 (2009) 179–212 197
results are largely insignificant. The findings from this analysis further doubt the
efficacy of pressure worldwide to separate the combined CEO and COB position.
3.3. Changes in ROA performance: Low, moderate, and high
One could further argue that our adjustments for macroeconomic factors and
mean reversion do not adequately control for firms that performed well above (and
well below) their industry peers in the period preceding adoption of the Cadbury
recommendation. To address this concern, we split the adopted-Cadbury/separated
set into three subsets as of year y − 1: “low performers,”“moderate performers,” and
“high performers.”
12
This procedure is then repeated for the three benchmarks sets
of firms. For each subset of the adopted-Cadbury/separated firms and their industry-
and performance-matched always separated firms, we calculate the mean ROAs and
mean changes in ROA over the intervals y − 1 through y + 1, y − 1 through y + 2,
and y − 1 through y + 3. The results are presented in Table 4. Table 5 presents a

parallel set of results for the always joined CEO/COB firms, and Table 6 presents a
parallel set of results for the combined CEO/COB firms.
The key question that we ask here is whether the change in performance for the
adopted-Cadbury firms relative to peer performance-matched firms is mean revert-
ing (i.e., for the low, moderate, and high performers). If it is believed that mandating
separation in the combined position of the CEO and COB would improve corporate
board oversight and translate into better corporate performance, then one might hy-
pothesize that firms adopting the Cadbury recommendation would ultimately deliver
better operating performance relative to their peers. The results in columns H and I of
Tables 4 and 5 do not support this thesis. There is a decline in ROA for firms adopting
the Cadbury recommendation vis-`a-vis benchmark firms in the low and moderate
subsets. Of the 18 differences in the mean ROAs between the subsets, only two are
statistically significant at conventional levels.
The adoption of the Cadbury recommendation does, however, offer some hope
of mean reversion in the high performers. As shown in column J of Tables 4–6, when
the high performers of adopted-Cadbury firms are compared with the high performers
of the three other sets of firms, the mean changes in ROA for the adopted-Cadbury
firms are, over all three intervals, always greater than the mean changes for the always
separated, always joined, and combined firms. The results are positive and significant
in all three intervals against the “Created joint CEO/COB” benchmark and in one of
the six intervals against the other two benchmarks.
The message that comes through this analysis is that regardless of starting point,
the adoption of the Cadburyrecommendation does not seem to(significantly) improve
12
Specifically, we rank the adopted-Cadbury set of firms from lowest to highest ROA in year y − 1. The
one-third of firms with the lowest ROA is put into the low performers subset. The one-third of firms with
the highest ROA is put into the high performers subset. The remaining firms with the moderate ROA are
put in the moderate performers subset.
198 J. Dahya et al./The Financial Review 44 (2009) 179–212
Table 4

ROA and change in ROA for firms that split the joint CEO/COB titles and their industry- and performance-matched firms that always maintained
separate titles for the CEO and COB on the LSE over the period 1989–1996
The sample includes 1,124 firms that enter the analysis with at least one year of data. We split the sample into four mutually exclusive groups: (1) the set of firms that separated
the titles of CEO and COB so as to come into compliance with the Cadbury Committee recommendation listed on the LSE any year over the period 1989–1996 (the split
CEO/COB titles set), (2) the set of firms that maintained separate titles in all years in which they were listed over the period 1989–1996 (the always-separate CEO/COB
titles set), (3) the set of firms that never split the titles of CEO and COB any year in which they were listed over the period 1989–1996 (the joint CEO/COB titles set), and
(4) the remaining set of firms which comprise those that joined separate CEO and COB titles to form a single post any year in which they were listed over 1989–1996 (the
create joint CEO/COB titles set). To determine into which set to classify a firm, we identified the CEO and COB each year for each firm from the Stock Exchange Yearbook.
Accounting information to compute ROA is taken from Datastream. ROA is calculated as earnings before interest, taxes and depreciation divided by the total book value of
assets. Industry matching is based on FTIC. Performance matching is based on ROA in year y − 1.
Industry- & Industry- &
performance- performance-
matched matched
Split CEO/COB always-separate Split CEO/COB always-separate
titles over CEO/COB titles over CEO/COB
1989–1996 firms titles firms 1989–1996 firms titles firms
Difference Difference
in means in means
Low Moderate High Pre Post
ROA ROA ROA 1992 1993
(in %) (in %) (in %) (in %) (in %)
Low Moderate High Low Moderate High (col. B (col. C (col. D Pre Post Pre Post (col. K (col. L
Event ROA ROA ROA ROA ROA ROA minus minus minus 1992 1993 1992 1993 minus minus
year (in %) (in %) (in %) (in %) (in %) (in %) col. E) col. F) col. G) (in %) (in %) (in %) (in %) col. M) col. N)
(A) (B) (C) (D) (E) (F) (G) (H) (I) (J) (K) (L) (M) (N) (O) (P)
Panel A: Return on assets (mean ROA in percent)
y − 1 −1.39 9.02 18.88 −0.68 8.94 19.95 7.74 8.92 7.92 8.99
y −0.83 8.76 19.21 −0.85 9.21 20.21 8.21 8.54 8.20 9.09
y + 1 −0.11 8.93 19.30 0.32 9.30 20.20 8.89 8.59 8.35 9.62
y + 2 0.14 8.99 19.35 1.04 9.88 19.89 10.25 8.55 9.21 9.91

y + 3 0.08 8.65 19.31 1.62 9.35 20.33 9.31 8.43 9.07 9.86
Panel B: Change in return on assets (mean ROA in percent)
y − 1toy + 1 1.28
b
−0.09 0.42 1.00 0.36 0.25 0.28 −0.45 0.17 1.15 −0.33 0.43 0.63 0.72 −0.96
y − 1toy + 2 1.53
b
−0.03 0.47 1.72
b
0.94 −0.06 −0.19 −0.97 0.53 2.51
a
−0.37 1.29
b
0.92 1.22
b
−1.29
b
y − 1toy + 3 1.47
b
−0.37 0.43 2.30
a
0.41 0.38 −0.83 −0.78 0.05 1.57
b
−0.49 1.15 0.87 0.42 −1.36
b
a
and
b
indicate significance at the 0.01 and 0.05 level.
J. Dahya et al./The Financial Review 44 (2009) 179–212 199

Table 5
ROA and change in ROA for firms that split the joint CEO/COB titles and their industry- and performance-matched firms that maintained joint titles
for the CEO and COB on the LSE over the period 1989–1996
The sample includes 1,124 firms that enter the analysis with at least one year of data. We split the sample into four mutually exclusive groups: (1) the set of firms that separated
the titles of CEO and COB so as to come into compliance with the Cadbury Committee recommendation listed on the LSE any year over the period 1989–1996 (the split
CEO/COB titles set), (2) the set of firms that maintained separate titles in all years in which they were listed over the period 1989–1996 (the always-separate CEO/COB
titles set), (3) the set of firms that never split the titles of CEO and COB any year in which they were listed over the period 1989–1996 (the joint CEO/COB titles set), and
(4) the remaining set of firms which comprise those that joined separate CEO and COB titles to form a single post any year in which they were listed over 1989–1996 (the
create joint CEO/COB titles set). To determine into which set to classify a firm, we identified the CEO and COB each year for each firm from the Stock Exchange Yearbook.
Accounting information to compute ROA is taken from Datastream. ROA is calculated as earnings before interest, taxes and depreciation divided by the total book value of
assets. Industry matching is based on FTIC. Performance matching is based on ROA in year y − 1.
Industry- & Industry- &
performance- performance-
matched matched
Split CEO/COB joint Split CEO/COB joint
titles over CEO/COB titles over CEO/COB
1989–1996 firms titles firms 1989–1996 firms titles firms
Difference Difference
in means in means
Low Moderate High Pre Post
ROA ROA ROA 1992 1993
(in %) (in %) (in %) (in %) (in %)
Low Moderate High Low Moderate High (col. B (col. C (col. D Pre Post Pre Post (col. K (col. L
Event ROA ROA ROA ROA ROA ROA minus minus minus 1992 1993 1992 1993 minus minus
year (in %) (in %) (in %) (in %) (in %) (in %) col. E) col. F) col. G) (in %) (in %) (in %) (in %) col. M) col. N)
(A) (B) (C) (D) (E) (F) (G) (H) (I) (J) (K) (L) (M) (N) (O) (P)
Panel A: Return on assets (mean ROA in percent)
y − 1 −1.39 9.02 18.88 −1.47 8.21 20.25 7.74 8.92 6.88 8.96
y −0.83 8.76 19.21 −0.97 8.60 19.44 8.21 8.54 7.25 8.94
y + 1 −0.11 8.93 19.30 −0.68 8.85 18.69 8.89 8.59 8.11 8.98

y + 2 0.14 8.99 19.35 −0.32 9.14 20.48 10.25 8.55 8.04 9.65
y + 3 0.08 8.65 19.31 0.45 9.32 20.79 9.31 8.43 8.22 9.80
Panel B: Change in return on assets (mean ROA in percent)
y − 1toy+ 1 1.28
b
−0.09 0.42 0.79 0.64 −1.56
b
0.49 −0.73 1.98
a
1.15 −0.33 1.23 0.02 −0.08 −0.35
y − 1toy + 2 1.53
b
−0.03 0.47 1.15 0.93 0.23 0.38 −0.96 0.24 2.51
a
−0.37 1.16 0.69 1.35
b
−1.06
y − 1toy + 3 1.47
b
−0.37 0.43 1.92
b
1.11 0.54 −0.45 −1.48
b
−0.11 1.57
b
−0.49 1.34
b
0.84 0.23 −1.33
b
a

and
b
indicate significance at the 0.01 and 0.05 level.
200 J. Dahya et al./The Financial Review 44 (2009) 179–212
Table 6
ROA and change in ROA for firms that split the joint CEO/COB titles and their industry- and performance-matched firms that created joint titles for
the CEO and COB on the LSE over the period 1989–1996
The sample includes 1,124 firms that enter the analysis with at least one year of data. We split the sample into four mutually exclusive groups: (1) the set of firms that separated
the titles of CEO and COB so as to come into compliance with the Cadbury Committee recommendation listed on the LSE any year over the period 1989–1996 (the split
CEO/COB titles set), (2) the set of firms that maintained separate titles in all years in which they were listed over the period 1989–1996 (the always-separate CEO/COB
titles set), (3) the set of firms that never split the titles of CEO and COB any year in they were listed over the period 1989–1996 (the joint CEO/COB titles set), and (4) the
remaining set of firms which comprise those that joined separate CEO and COB titles to form a single post any year in which they were listed over 1989–1996 (the create
joint CEO/COB titles set). To determine into which set to classify a firm, we identified the CEO and COB each year for each firm from the Stock Exchange Yearbook.
Accounting information to compute ROA is taken from Datastream. ROA is calculated as earnings before interest, taxes and depreciation divided by the total book value of
assets. Industry matching is based on FTIC. Performance matching is based on ROA in year y − 1.
Industry- & Industry- &
performance- performance-
matched matched
Split CEO/COB created Split CEO/COB created
titles over CEO/COB titles over CEO/COB
1989–1996 firms titles firms 1989–1996 firms titles firms
Difference Difference
in means in means
Low Moderate High Pre Post
ROA ROA ROA 1992 1993
(in %) (in %) (in %) (in %) (in %)
Low Moderate High Low Moderate High (col. B (col. C (col. D Pre Post Pre Post (col. K (col. L
Event ROA ROA ROA ROA ROA ROA minus minus minus 1992 1993 1992 1993 minus minus
year (in %) (in %) (in %) (in %) (in %) (in %) col. E) col. F) col. G) (in %) (in %) (in %) (in %) col. M) col. N)
(A) (B) (C) (D) (E) (F) (G) (H) (I) (J) (K) (L) (M) (N) (O) (P)

Panel A: Return on assets (mean ROA in percent)
y − 1 −1.39 9.02 18.88 −1.52 6.99 21.23 7.74 8.92 7.24 8.89
y −0.83 8.76 19.21 −1.49 6.24 19.40 8.21 8.54 8.00 6.89
y + 1 −0.11 8.93 19.30 −1.32 6.04 18.65 8.89 8.59 8.65 6.95
y + 2 0.14 8.99 19.35 −0.64 7.21 18.82 10.25 8.55 9.21 6.64
y + 3 0.08 8.65 19.31 −0.10 6.99 18.99 9.31 8.43 8.94 6.72
Panel B: Change in return on assets (mean ROA in percent)
y − 1toy+ 1 1.28
b
−0.09 0.42 0.20 −0.95 −2.58
a
1.08 0.86 3.00
a
1.15 −0.33 1.41
b
−1.94
b
−0.36 1.61
b
y − 1toy+ 2 1.53
b
−0.03 0.47 0.88 0.22 −2.41
a
0.65 −0.25 2.88
a
2.51
b
−0.37 1.97
b
−2.25

a
0.54 1.88
b
y − 1toy+ 3 1.47
b
−0.37 0.43 1.42
b
0.00 −2.24
a
0.05 −0.37 2.67
a
1.57
b
−0.49 1.70
b
−2.17
a
−0.13 1.68
b
a
and
b
indicate significance at the 0.01 and 0.05 level.
J. Dahya et al./The Financial Review 44 (2009) 179–212 201
operating performance when the benchmark comprises firms that always separated
the combined CEO and COB position. It is worth reiterating that firms with high
operating performance prior to the adoption of the Cadbury recommendation do, in
general, outperform all peer firms; however, the results are not always statistically
significant.
3.4. Changes in ROA performance from before to after December 1992

One additional question that may arise from our analysis so far is that we have
not distinguished between firms that split the combined position of CEO and COB
following the publication of the Cadbury Report and those that voluntarily chose
this undertaking pre-December 1992. In fact, 390 firms in the adopted-Cadbury set
split the combined post of CEO and COB between January 1989 and December
1992. We therefore dichotomize the sample further into those firms that came into
compliance before and after December 1992 and repeat our analysis of ROA using
the industry- and performance-matched firms as benchmarks for each subsample,
pre-1992 and post-1993. The results are given in Table 4, columns K–P, when the
benchmark comprised of the always separated. In Table 5, columns K–P, we mimic
the analysis for the always joined benchmark firms. In Table 6, columns K–P, w e
repeat the analysis with the created joint CEO and COB matched firms.
The results on this analysis in Tables 4–6 are strikingly different and contingent
on when the firms adopted the Cadbury recommendation. As shown in columns K
and L in Tables 4–6, firms that separated the combined position prior to the publica-
tion of the Cadbury Report, on average, report a change in ROA that is 2.51% and
1.57%, respectively, over y − 1toy + 2 and y − 1toy + 3. Both increases in ROA
are statistically significant at the 0.05% level or less. In contrast, the change in ROA
for firms splitting the combined position following the issuance of the Cadbury Re-
port, on average, exhibited poorer performance. For example, the change in ROA for
those firms splitting following the publication of the Cadbury Report is −0.37% and
−0.49%, respectively, over y − 1toy + 2 and y − 1toy + 3. However, neither decline
in ROA is statistically significant. One interpretation of this result is that adoption of
the Cadbury recommendation following its issuance led to a modest deterioration in
operating performance, albeit not significant.
Columns M–P in Tables 4–6 report results for industry- and performance-
benchmarked change in ROA for firms adopting the Cadbury recommendation in
the pre-1992 and post-1993 periods. The message that surfaces is fourfold. First,
firms creating the combined CEO and COB position following the issuance of the
Cadbury Report appear to be correlated with a sudden decline in operating perfor-

mance. Second, firms adopting the recommendation following the issuance of the
Cadbury Report appear to also be correlated with a decline in operating performance,
albeit, to a lesser degree. Third, firms adopting the recommendation after December
1992 perform worse than firms in the always separated and always joined sets but sig-
nificantly better than firms that created the combined CEO and COB position. Fourth,
202 J. Dahya et al./The Financial Review 44 (2009) 179–212
voluntary separation of the combined CEO and COB position pre-publication of the
Cadbury Report is rewarded with a minor uptick in corporate performance that ex-
ceeds the always separated and always combined sets (in Tables 4 and 5, respectively)
and mixed results for the created joint CEO and COB set.
Taken at face value, these results appear to fly in the face of the Cadbury Com-
mittee with respect to this one key recommendation. The empirical evidence suggests
that the selection of an optimal leadership structure appears to differ across firms and
that firms seem to be able to choose their own optimal leadership structure. Pressure
toward the separation of the combined CEO/COB position in the United Kingdom
appears to be misguided. Our findings are consistent with the conjecture advanced by
Dahya and Travlos (2002) and the empirical findings of Schmid and Zimmermann
(2007) who fail to show any relation between leadership structure and corporate per-
formance in a sample of 152 industrial companies traded on the Swiss Exchange in
2002.
At leastwith respectto thecombined CEO/COBposition, theunivariate statistics
show that the recommendation of the Cadbury Committee was ill-advised.
3.5. Multivariate tests of statistical significance
By construction, the univariate tests control for industry factors that might affect
ROA and also for the presence of mean reversion in ROA. One further factor that has
been shown to influence ROA is size of the firm. To control for the influence that size
may have on ROA and changes in ROA, we estimate regressions using the change
in industry-matched and industry- and performance-matched ROA across event time
as the dependent variable. In addition to firm size, we also include the fractional
equity ownership of the CEO and the percentage of outside directors on the corporate

board as additional control variables since our descriptive statistics in Table 2 hint a
possible relation between these variables and CEO/COB configuration. In the first
set of regressions, we include the adopted-Cadbury firms and their matched always
separated firms. The independent variables are an indicator for “Adopted Cadbury
& separated joint CEO and COB” firms (1), or “Always separated CEO and COB”
firms (0), the log of book assets, and an indicator for pre (0)- and post (1)-December
1992 adoption. The regression is estimated separately for intervals y − 1 through
y + 1, y − 1 through y + 2, and y − 1 through y + 3. The regressions are estimated
separately with the always separated industry-matched firms and with the always
separated industry- and performance-matched firms. Thus, there are six regressions,
the results of which are presented in Panel A of Table 7.
The coefficients on the percentage of outside directors, firm size and the post-
1992 indicator are never statistically significant, and the coefficient on top executive
equity ownership is negative and significant in about half the regressions in Panel A
of Table 7. We are most interested in the split CEO/COB indicator variables. The
coefficient on this variable is negative and insignificant in all but one regression.
Thus, in comparison with firms that always separated after controlling for firm size,
J. Dahya et al./The Financial Review 44 (2009) 179–212 203
Table 7
Regressions of the change in ROA on indicator variable for split CEO/COB titles (1) or not (0), percentage of outside directors, top executive equity
ownership, log of firm assets, and an indicator variable for the split of CEO/COB titles before (0) or after (1) December 1992 for U.K. industrial firms
listed on the LSE over the period 1989–1996
The dependent variable in each regression is the change in ROA over the interval indicated in the column heading. The independent variables are an indicator variable to
identify whether a firm split the titles of CEO/COB (1) or not (0), the percentage of outside directors, the equity ownership of the most senior executive, the log of book
value of assets and an indicator identify whether the firm split the CEO/COB titles after 1992. The sample includes 1,124 firms that enter the analysis with at least one
year of data. We split the sample into four mutually exclusive groups: (1) the set of firms that separated the titles of CEO and COB so as to come into compliance with the
Cadbury Committee recommendation listed on the LSE any year over the period 1989–1996 (the split CEO/COB titles set), (2) the set of firms that maintained separate
titles in all years in which they were listed over the period 1989–1996 (the always-separate CEO/COB titles set), (3) the set of firms that never split the titles of CEO and
COB any year in which they were listed over the period 1989–1996 (the joint CEO/COB titles set), and (4) the remaining set of firms which comprise those that joined
separate CEO and COB titles to form a single post any year in which they were listed over 1989–1996 (the create joint CEO/COB titles set). To determine into which set to

classify a firm, we identified the CEO and COB each year for each firm from the Stock Exchange Yearbook. Accounting information for ROA is taken from Datastream.
ROA is calculated as earnings before interest, tax and depreciation divided by beginning of year assets. Log assets are the logarithm of book assets as of the beginning of the
year. Industry matching is based on FTIC. Performance matching is based on ROA in year y − 1. The ordinary least squares regressions are reported with robust standard
errors using Huber-White-Sandwich estimates of variance. p-values are reported in parentheses.
Split CEO/COB titles over 1989–1996 Split CEO/COB titles over 1989–1996
& industry-matching firms’ & industry- and performance-matching
changes in ROA firms’ changes in ROA
(dependent variable = ROA) (dependent variable = ROA)
Independent variable y − 1toy + 1 y − 1toy + 2 y − 1toy + 3 y − 1toy + 1 y − 1toy + 2 y − 1toy + 3
Panel A: Split CEO/COB titles firms matched with always-separate CEO/COB titles firms
Intercept 0.027 (0.12) 0.000 (0.99) 0.023 (0.38) 0.026 (0.18) 0.022 (0.25) 0.010 (0.71)
Split CEO/COB titles over 1989–1996 (1) −0.002 (0.86) −0.005 (0.65) −0.038 (0.06) −0.002 (0.98) −0.007 (0.57) −0.013 (0.55)
Percentage of outside directors (%) 0.025 (0.41) 0.028 (0.38) 0.043 (0.15) 0.020 (0.45) 0.031 (0.34) 0.045 (0.14)
Top executive equity ownership (%) −0.117 (0.04) −0.038 (0.26) −0.031 (0.42) −0.109 (0.05) −0.110 (0.05) −0.045 (0.33)
Log assets −0.000 (0.96) −0.001 (0.49) −0.001 (0.42) −0.000 (0.87) −0.001 (0.64) −0.001 (0.45)
Split CEO/COB titles Post 1993 indicator −0.001 (0.97) −0.011 (0.33) −0.001 (0.95) −0.003 (0.84) −0.014 (0.25) −0.025 (0.28)
Adj. R
2
0.0033 0.0062 0.0130 0.0029 0.0082 0.0075
(continued)