Internal governance and investment efficiency: The role of non-CEO executives

In this paper, we reveal an overlooked but important role of corporate governance on investment efficiency: nonCEO executives. Internal governance, measured as the fraction of independent executives appointed before the current CEO, leads to a better investment efficiency. The governance effect is pronounced when executives have stronger incentives, such as a longer horizon or a higher shareholding ratio. To explain the promotion of investment efficiency, we find that independent executives help constrain CEO power. They also contribute to better quality of accounting information. Moreover, internal governance by non-CEO executives is hardly affected by external supervisors, and other internal governance mechanisms fail to enhance firms' investment efficiency, indicating the unique monitoring role of independent non-CEO executives. Our study demonstrates the significance of a democratic management team and the necessity to limit the power of CEOs to appoint new executives.