CEOs' structural power, prestige power, and target ratcheting

Abstract

This paper examines whether and how different types of CEO power affect the incorporation of past performance into CEOs' future targets. We theorize that CEOs can use their structural and prestige power to downward bias the target updating process to receive easier targets. However, CEOs with high prestige power may be more willing to accept target increases due to the signaling value of ambitious targets. Results from data on earnings per share (EPS) targets support our hypotheses. We find that asymmetric upward ratcheting, as reported in prior studies, is mostly driven by low-power CEOs. In contrast, CEOs with structural power receive weaker upward and stronger downward target adjustments. CEOs with prestige power receive favorable upward and downward target adjustments relative to CEOs with low power but not relative to CEOs with structural power. Interestingly, the two types of power do not have additive effects on target adjustments. Moreover, we use three natural experiments that enhance the signaling motive of CEOs and find that after these events, CEOs with prestige power agree to more challenging upward revisions compared to low-power CEOs. Our results contribute to accounting literature by distinguishing between different types of CEO power and by examining how organizational and social factors affect target-setting dynamics.