Abstract
The question of why some firms grow faster than others is of high theoretical and practical importance. Beyond a wealth of studies based on stochastic models, firm growth has mostly been explained by looking at the structural characteristics of firms, sectors, and countries. The role of managers’ characteristics in fostering firms’ growth has been explored much less. In this study, we adopt one key characteristic of managers, the age of the chief executive officer (CEO) and examine its relationship with the firm’s organic growth. Using data from a large sample of European manufacturing firms, we find that firms managed by young CEOs grow faster in terms of sales and assets, but not in terms of profitability. These results hold with the inclusion of a large vector of firm and CEO characteristics, and a battery of robustness checks, including issues related to the time horizon and appointment of CEOs, the educational attainment of younger cohorts of managers, and endogeneity. We hypothesize that young CEOs are incentivized to boost firm growth to signal their talent in the managerial market and to secure a longer stream of future compensation benefits. To the extent that firm growth does not translate into higher profitability, this may create an agency problem, due to the divergence of this corporate strategy from shareholders’ targets. In line with this hypothesis, we find that a more concentrated ownership that allows for more effective monitoring moderates the relationship between CEO age and firm growth.
Highlights
Why do some firms grow faster than others? This question touches upon a key feature of market economies, which has implications for macroeconomic performance, the evolution of industries, business strategy, and policy-making
We show that the age of chief executive officer (CEO) is significantly associated with firm organic growth
In a large sample of mostly small and medium privately held European manufacturing firms, we find that, at the median of the conditional growth rates distribution, the growth in sales per unit of time over the period 2009–2014 was 0.66 (0.52) log points higher in firms managed by CEOs younger than 45
Summary
Why do some firms grow faster than others? This question touches upon a key feature of market economies, which has implications for macroeconomic performance, the evolution of industries, business strategy, and policy-making. When controlled for industry-country unobserved heterogeneity and a relevant set of firm and CEO characteristics, firms managed by CEOs younger than 45 grow faster (over the period 2009–2014) in terms of both sales and total assets than those managed by older CEOs at the median (50th percentile) of the conditional growth rate distribution. We show that the effect is asymmetric along the distribution of growth rates: firms managed by younger CEOs do grow more than their counterparts managed by older CEOs, and this difference is stronger in the highest (75th and 90th) conditional percentiles This result is consistent across all the countries considered.
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