In the CEO We Trust: Negative Effects of Trust Between the Board and the CEO

Kee-Hong Bae, Sadok El Ghoul, Zhaoran (Jason) Gong, and Omrane Guedhami

In this study, we investigate whether and how trust between board members and the CEO (board–CEO trust) affects the performance of mergers and acquisitions. Contrary to conventional wisdom, we find that firms with higher levels of board–CEO trust exhibit poor M&A performance: High trust is associated with low acquisition announcement returns, long-term stock return performance, and post-deal operating performance. This negative effect of board–CEO trust is more pronounced among acquiring companies prone to agency problems. Our results suggest that, in the institutional setting of a board of directors, high trust can be too much of a good thing.