Dartmouth College, Tuck School of Business, United States
Performance below aspiration levels is a key driver of change, but theory and evidence regarding the specific types of change prompted by low performance are still limited. This study posits that the power held by CEOs influences the type of changes made in response to low performance. More motivated to seek valued rewards and less constrained by social norms and internal resistance, we suggest that high power CEOs are more prone to make ‘rapid impact on performance’ (‘RIP’) changes, which have an immediate positive effect on firm performance, such as drastic decreases in employment and capital expenditures. Conversely, less powerful CEOs may shy away from such aggressive changes. Using a panel of S&P 1500 firms and an instrumental variable approach, we find that CEO power is significantly and positively related to RIP changes when firms’ Return on Assets, a primary performance indicator, falls below the aspiration level. Importantly, broad strategic change is unaffected by CEO power, and the relationship of CEO power to RIP changes is weaker when performance on a secondary goal is positive and when the CEO faces stronger accountability pressures. This research advances understanding of how performance impacts strategic change decisions, highlighting differences between high and low power CEOs.
