Market For CEOs Research Articles

The Market for CEOS: Evidence from Private Equity

The Market for CEOS: Evidence from Private Equity

The Market for CEOs: Evidence from Private Equity

The Market for CEOs: Evidence from Private Equity

The Distributional Effect of Trade on the CEO Market

We study the relationship between trade openness and CEO pay dispersion across firms. Using US firm‐level data, we show that trade has an unequal effect on CEO equilibrium pay at firms of different sizes (sales). An increase of 10% in the industry openness degree raises CEO compensation by about 14% in firms at the 99th percentile of the size distribution. However, CEO compensation falls by 5% in firms at the 1st percentile. Analogous results are derived for other points of the distribution. Our results show that trade openness impacts inequality within the very top of the income distribution, where skill differentials are less evident.

Optimal CEO turnover

We study a dynamic principal-agent/firm-CEO relationship that is subject simultaneously to moral hazard, limited commitment, and shocks to the CEO's market value. Termination is used as (a) an incentive instrument to punish the CEO for bad performance, (b) a cost minimization device that uses the CEO's outside value as an external means for compensation, and (c) as a means for replacing the incumbent CEO with a less expensive new CEO. Termination occurs after the CEO receives either a sufficiently high or a sufficiently low outside value. The model generates both voluntary and involuntary/forced turnovers, and counter-offers occur on the equilibrium path. The model is calibrated to the U.S. data to capture the key observed features of CEO pay and turnover. It shows that increased moral hazard offers an explanation for the observed increase in the level and variance of CEO compensation, as well as the increase in forced CEO turnover.

Trading behavior of institutional investors and CEO's market timing

We use excess return, risks, MB ratios, and cumulative abnormal return as proxies to examine the CEO's market timing. The empirical results indicate that CEOs have been exactly in timing the market for Seasonal equity offering (SEO) events. CEOs have more incentives to execute seasonal equity offering when CAR reach peak and market risk drop to the lowest point that investors become less worried about risks. Evidence also shows that institutional investors do not own insider information before SEO but when issuance date appears, they recognize that CEOs are exploiting insider information in order to issue stocks at the highest price. Hence, the institutional investors switch their trading behavior from long positions to short positions to dodge the potential losses inflicted by the CEO's market timing. The fund manager recognizes that CEOs are implementing market timing so they can earn a positive return in the future. In contrast, security dealers and foreign investors do not recognize the CEO's market timing action, so they do not react, resulting in negative returns in the future.

The Market for CEOS: Building Legacy and Feeling Empowered Matter

We develop a two-sided multidimensional matching model of the market for CEOs that allows for both pecuniary and non-pecuniary (amenity) compensation. The model is estimated by maximum likelihood estimation using matched CEO-firm data from Denmark. We show that CEOs have preferences for building legacy and gaining empowerment. The legacy mechanism explains why there is low mobility in the CEO market, even though firms demand general CEO skills. The empowerment mechanism explains why CEOs are willing to sacrifice significant pecuniary income to manage high equity firms. The overall conclusion is that job amenities matter in the market for CEOs.

The Market for CEOs: Evidence from Private Equity

The Market for CEOs: Evidence from Private Equity

Search, product market competition and CEO pay

We develop a market equilibrium model to show how search frictions in the CEO market, agency conflicts and product market characteristics interact to affect CEO market tightness, firm size and CEO incentive pay. The theory generates novel implications that link firms' product markets with CEO markets. Different determinants of competition—the entry cost, product substitutability, and market size—have contrasting effects on CEO market tightness, CEO pay and firm size. We also derive new predictions for the impact of product market risk on firm size and CEO incentive compensation. We show empirical support for several cross-sectional hypotheses derived from the theory for how CEO pay, CEO incentives, firm size and market tightness vary with product market characteristics.

The Market for CEOs

We study the market for CEOs of large publicly-traded US firms, analyze new CEOs’ prior connections to the hiring firm, and explore how hiring choices are determined. Firms are hiring from a surprisingly small pool of candidates. More than 80% of new CEOs are insiders, defined as current or former employees or board members. Boards are already familiar with more than 90% of new CEOs, as they are either insiders or executives who directors have previously worked with. There are few reallocations of CEOs across firms – firms raid CEOs of other firms in only 3% of cases. Pay differences appear too small to explain these hiring choices. The evidence suggests that firm-specific human capital, asymmetric information, and other frictions have first-order effects on the assignment of CEOs to firms.

Public-Private CEO Wage Gap in Transitional Economies: The Role of Caste in the Market for CEOs

In the context of transitional economies such as India, astronomical differences in pay between public and private sector top executives has been a subject of much public contention. Moving beyond mere market-based explanations of such wage inequalities, social scientists across disciplines have increasingly started to acknowledge the important role of sociological forces such as institutions and social norms in shaping such market based-forces. In this article we suggest that the institution of caste –a hitherto under explored sociological force –significantly influences the executive labor market and consequently the public-private CEO wage gap. Further, we posit that the state’s governance orientation (pro- market vs. pro-society) is an important contingency in this relationship.

The Market for CEOs

We study the market for CEOs of large publicly-traded US firms, analyze new CEOs’ prior connections to the hiring firm, and explore how hiring choices are determined. Firms are hiring from a surprisingly small pool of candidates. More than 80% of new CEOs are insiders, defined as current or former employees or board members. Boards are already familiar with more than 90% of new CEOs, as they are either insiders or executives who directors have previously worked with. There are few reallocations of CEOs across firms – firms raid CEOs of other firms in only 3% of cases. Pay differences appear too small to explain these hiring choices. The evidence suggests that firm-specific human capital, asymmetric information, and other frictions have first-order effects on the assignment of CEOs to firms.

The Value of Luck in the Labor Market for CEOs

It is well-known that luck increases the compensation of CEOs at their current firm. In this paper, we explore how luck affects CEOs' outside options in the labor market, and the performance of firms that hire lucky CEOs. Our results show that luck at their current firm makes CEOs move to a new firm and be appointed as both CEO and chairman. Lucky CEOs tend to match with firms subject to low analyst coverage and operating in less competitive industries. Moreover, lucky CEOs are able to obtain a higher pay at the new firm (both in absolute terms and compared to new industry peers). Finally, difference-in-differences results show that hiring lucky CEOs hurts firm performance, mostly due to a surge in operating costs and a poorer usage of corporate assets.

The Curse of Extremes: Generalist Career Experience and CEO Initial Compensation

Studies argue that generalist CEOs are more valued by the market for executive labor and receive higher initial compensation. Challenging this prevailing assumption, we acknowledge the drawbacks of extensive career mobility and predict an inverted U-shape relationship between CEO generalist career experience and CEO initial compensation. Integrating the generalism and specialization views of human capital, we postulate that at an initial level, the acquisition of experience breadth from different firms and industries enables CEOs to broaden their knowledge base, obtain a variety of skills, and thus increase their labor market value and initial compensation. After a threshold, however, the accumulation of extensive levels of career generalism through frequent job hopping across firm and industry contexts gradually causes a lack of experience depth and insufficient career specialization, thereby triggering lower CEO market value and initial pay. Data from 197 CEO appointments in large, publicly traded firms support our predictions. Our results also show that the observed inverted U-shape relationship varies with factors nested at different layers of context, highlighting the contingent nature of this area of research.

The Dark Side of Industry Tournament Incentives

Top executives’ reputation and rewards from the managerial labor market are at least partly determined by the financial information their firms convey to the capital markets. We thus examine whether managerial labor market incentives influence firms’ choices in such information transmission and whether these choices subsequently affect future outcomes in the managerial labor market. Our findings are consistent with a strategic information distortion hypothesis. Specifically, CEOs facing greater labor market incentives are more likely to engage in strategic financial disclosure choices to inflate their firms’ reported performance and to meet or narrowly beat earnings benchmarks, thereby enhancing their reputation and upward mobility in the labor market. At the same time, these CEOs are more careful not to commit disclosure maneuvers that trigger financial fraud and restatements, which will severely damage their reputation and undermine their future career prospects. These empirical patterns portray a nuanced picture of how CEOs respond strategically to labor market incentives and career concerns in making financial disclosure decisions. We further show that these decisions affect managerial labor market outcomes; consistent marginal benchmark beating leads to higher compensation and greater mobility in the labor market for CEOs.

Why Do Boards Let Their CEOs Take Outside Directorships? Entrenchment and Embeddedness

We study the supply side of the market for CEOs as outside board members in the context of increasing legal and shareholder pressure on CEOs to refrain from accepting outside directorships. Consistent with potential benefits to their employing firms, CEOs have been increasingly more likely to accept directorships at vertically-related firms, especially when information and learning about upstream/downstream industries is expected to be particularly valuable. CEO director- ships at vertically-related firms have a significant positive effect on firm value and performance and help their firms handle industry shocks, especially in innovative industries where anticipating demand and supply conditions is crucially important. Consistent with agency/entrenchment costs, CEO outside directorships at unrelated firms are more likely for sending firms with weaker governance and have a significant negative effect on firm value. Taken together, our results suggest that external pressure has reduced the number of outside directorships that CEOs take and has improved their overall quality, although some evidence of agency problems remains.

Does the Theory of Marginal Productivity Apply to CEOs

The distribution of earnings in the United States has become more unequal in recent decades. The main reason is that the earnings of workers at the top of the distribution have increased more than the earnings of workers at the middle or bottom of the distribution. Some economists argue that higher CEO pay is one reason for the increase in inequality. According to one explanation, CEO pay has grown for the same reasons as the increase in pay in other occupations. Another explanation is that the labor market for CEOs does not fit the model of perfect competition and that CEOs are able to influence how much they are paid. A third explanation is that the labor market for CEOs is like the market for entertainment superstars. The supply of persons qualified to be CEOs is relatively inelastic. An increase in demand raises CEO pay. This paper considers a fourth explanation for the increase in CEO pay. The demand for CEOs may be relatively inelastic. An increase in CEO pay may not affect the number of CEOs employed. Thus, the theory of marginal productivity may not apply to CEOs.

The Externality in the CEO Market and Regulating Board Independence

This paper discusses shareholder value and regulation on board independence. Shareholder value increases with a firm’s and, more importantly, other firms’ board independence. Shareholders set inefficiently low board independence because they fail to internalize the positive externality of higher board independence on other firms or they use low board independence to compete for CEO talent. This suggests that shareholder activism cannot substitute regulation. However, mandating minimum board independence can only remove the inefficiency caused by talent competition but not externality.

Board and the Market for CEOs

We examine the equilibrium matching pattern between firms and CEOs in a cash flow diversion environment. We show that aggregate economic shock drives matching pattern by affecting the tradeoff between firm-CEO complementarity and monitoring cost. Our results explain why CEO turnover is driven by exogenous economic shock. We show Gabaix and Landier (2008)’s cross-sectional and time-series predictions on CEO compensation are valid only if positive assortative matching (PAM) holds, and empirical applications relying on PAM are generally more robust with subsamples of large firms. Our results suggest firm-CEO complementarity is not sufficient for PAM even in a unidimensional matching framework.

Geography and the Market for CEOs

I examine the role of geography in the market for CEOs and find that firms hire locally five times more often than expected if geography were irrelevant to the matching process. This local matching bias is widespread and exists even among the largest U.S. firms. Tests reveal that both labor supply and demand influence local matching. Compensation and unforced turnover are lower for local than for nonlocal CEOs, and the compensation of local CEOs depends on local labor market factors, unlike that of nonlocal CEOs. These findings suggest the presence of market segmentation and contrast with much of the prior literature, which explicitly or implicitly assumes a single national market. This paper was accepted by Lauren Cohen, finance.

Pre-CEO Executive Skill Accumulation, Firm Size and Pay Limits in the CEO market

Pre-CEO Executive Skill Accumulation, Firm Size and Pay Limits in the CEO market