Abstract
An examination of268 CEO appointments in USfirms indicates that, on average, appointment ofa better-quality CEO (a CEO who receives a pay premium ex-ante) is accompanied by an immediate positive revaluation of stock prices, and is followed by an improvement infirm performance. This evidence supports the notion ofjointly efficient and integrated labor and capital markets. The findings are particularly strong in non-regulated industries. The managerial labor market appears somewhat less efficient in internal successions, and the stock market appears less efficient or only relatively weakly integrated with the labor market in smallfirm appointments. This study examines the hypothesis that the managerial labor market and the capital market are jointly efficient and integrated with respect to Chief Executive Officer appointments. In an efficient labor market, the firm hires a new CEO from a slate of internal and external candidates, and offers a compensation contract commensurate with the person's quality and potential contribution to firm value. Further, if labor and capital markets are linked and jointly efficient, the stock market would respond positively to appointments of new CEOs who receive a pay premium in the labor market, indicating they are of better quality. Finding evidence of joint efficiency is a non-trivial task. First, there are doubts about the rationality or efficiency of the managerial labor market. This is because CEO compensation
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