Is CEO Human Capital Related to Firm Performance?

Abstract

The global economy experienced continuous growth from 2002 to 2007 until the U.S. subprime mortgage crisis caused instability in worldwide stock markets. Simultaneously, global CEO turnover continued to fall to 13.8 percent in 2007. In contrast, the CEO turnover rate in Australia increased to 18 percent in 2007. The purpose of this paper is to determine whether the type of CEO human capital investment is associated with firm distress which sequentially is associated with firm performance. The empirical study of Australian listed firms (2005-2008) shows that the probability of bankruptcy is negatively associated with CEO’s general human capital and that firm distress is a significant determinant of CEO turnover. A CEO with more valuable firm specific human capital is less likely to be replaced/leave which in turn is associated increasing subsequent financial performance. Increasing financial performance is associated with decreasing investment in general human capital. These results are important because they imply that CEO firm specific experience is more important for increasing firm performance than general managerial skills despite the fact that recent research suggests that general human capital has increased in importance over firm-specific human capital.