Managers Who Lack Style: Evidence from Exogenous CEO Changes

Abstract

We study managerial style effects in investment decisions, financing policies, and firm profitability by examining exogenous CEO changes arising from deaths, health issues, and natural retirements. In a comprehensive panel of 8,615 Compustat firms from 1990 to 2007, we find that policy changes and profitability changes subsequent to exogenous turnover do not display abnormally high levels of variability. This evidence casts serious doubt on the hypothesis that managerial style effects play a causal role in firms' investment and financing decisions. We do detect abnormally high levels of variation in policies and profitability after endogenous leadership changes arising from forced CEO turnover. While this is unlikely to reflect a causal relation, it does suggest that underperforming firms tend to simultaneously change both managers and policies. In contrast to prior work, we find no convincing evidence that managers who serve at multiple firms tend to adopt a common style across employers. We also offer some methodological points on testing for the presence of managerial style effects in corporate decisions.