Market For CEOs Research Articles

The Link Between the Acquisitions Market and the Market for CEOs

Two empirical literatures tie the displacement of CEOs of widely-held companies to the poor performance of their firms≤the turnover and mergers and acquisitions (M&A) literatures. In this paper we demonstrate a strong link between CEO turnover and friendly acquisitions of target firms in the S&P 500 between 1992 and 2004. We find that acquisitions and internal &(2�WXUQRYHUDUHPRVWOLNHO\�WRRFFXUDWWKHVDPHSRLQWLQD�&(2∂VWHQXUH��URXJKO\�ILYH�\HDUV� after her initial appointment. We conjecture that deals are potential alternatives to CEO dismissal by the board or imminent CEO retirement. We explore interactions among CEO dismissals, retirements and resignations, and acquisitions on the one hand, and firm performance and CEO tenure on the other. We also investigate more specific hypotheses UHODWLQJWHQXUHWRD�&(2∂VDJH��VWDWXVDV� an inside or outside appointee, and the level of deal activity in the M&A market. Among our key findings is that the probability of a deal remains constant over the upper half of the age distribution of our sample CEOs, even though their probability of retiring increases sharply. This suggests that -- contrary to our conjecture -- impending retirement is not among the stronger incentives driving the management of target firms to seek friendly buyers. Finally, this paper contributes on the methodological level by comparing multinomial logistic regression≤the traditional methodology of turnover research≤to competing risk regression, a methodology adapted from epidemiological and medical research and recently introduced into the empirical finance literature.

To Each According to His Ability? CEO Pay and the Market for CEOs

Market-based theories predict that differences in CEO skills lead to potentially large differences in pay, but it is challenging to quantify the CEO skill premium in pay. In a first step toward overcoming this empirical challenge, we code detailed biographical information on a large sample of CEOs for a panel of S&P 1,500 firms between 1993 and 2005 to identify specific reputational, career, and educational credentials that are indicative of skills. Newly-appointed CEOs earn up to a 5% or $280,000 total pay premium per credential decile, which is concentrated among CEOs with better reputational and carreer credentials, those with the very best credentials, and those who run large firms. Consistent with the unique economic mechanism of market-based theories, CEO credentials have a positive impact on firm performance. The performance differential for newly-appointed CEOs is up to 0.5% per credential decile, and is also concentrated among CEOs with better reputational and career credentials and those at large firms. Credentials are positively correlated with unoberved CEO heterogeneity in pay and performance, which further validates our hypothesis that boards use them as publicly-observable signals of otherwise hard to gauge CEO skills. In all, our results offer direct evidence in support of market-based explanations of the overall rise in CEO pay.

Management Insights

Management Insights

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 non-local CEOs, and unlike non-local CEOs, the compensation of locals depends on local labor market factors. 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.

Managerial Entrenchment and the Market for CEOs

This paper studies managerial entrenchment in the presence of a broadening market for managers. Some degree of entrenchment helps create value for shareholders and is therefore desirable, but it also increases the cost of managerial turnover. Firms resolve this trade-off and choose an optimal level of entrenchment for their incumbent CEOs. As managerial skills become less firm-specific and more portable across firms, the market for talent offers better replacement opportunities of incumbents managers. Equilibrium pay also increases but, overall, the profitability of hiring an external CEO increases at large firms, where managerial talent is most productive. As a consequence, large firms reduce the entrenchment of their incumbents to better take advantage of possible market replacements. Equilibrium outcomes can however be inefficient if managers are subject to moral hazard and can exert effort to improve their productivity.

CEO SUCCESSION, HONING, AND ENTERPRISING: A PROMISING WAY TO ACHIEVE SMALL BUSINESS PERFORMANCE?

This study examines CEO succession in small firms and the impact of CEO honing and enterprising competence on firm performance within a contingency framework. In a study of 162 small firms, we hypothesize that a newly appointed CEO will bring entrepreneurship to its small firms, but the results do not support this. Instead, the results indicate that a new CEO tends to introduce honing in the firm. Only CEO market enterprising had a direct relation to better performance. However, we find several instances of moderation effects attributable to strategic competence, environmental uncertainty, and the nature of tasks in the company.

Managerial Capital and the Market for CEOs

This paper reconciles two pronounced trends in U.S. corporate governance: the increase in pay levels for top executives, and the increasing prevalence of appointing CEOs through external hiring rather than internal promotions. We propose that these trends reflect a shift in the relative importance of (transferable across companies) and firm-specific human capital (valuable only within the organization). We show that if the supply of workers in the corporate sector is relatively elastic, an increase in the relative importance of managerial ability leads to fewer promotions, more external hires, and an increase in equilibrium average wages for CEOs. We test our model using CEO pay and turnover data from 1970 to 2000. We show that CEO compensation is higher for CEOs hired from outside their firm, and for CEOs in industries where outside hiring is prevalent.

Organizational complexity and CEO labor markets: Evidence from diversified firms

We examine whether CEO turnover and succession patterns vary with firm complexity. Specifically, we compare CEO turnover in diversified versus focused firms. We find that CEO turnover in diversified firms is completely insensitive to both accounting and stock-price performance, but CEO turnover in focused firms is sensitive to firm performance. Diversified firms also experience less forced turnover than focused firms. Following turnover, replacement CEOs in diversified firms are older, more educated, and are paid more when hired. Collectively, our results indicate that the labor market for CEOs is different across diversified and focused firms and that firm complexity and scope affect CEO succession.

Incentive Pay and the Market for CEOs: An Analysis of Pay-For-Performance Sensitivity

Significant increases in CEO compensation in recent years have coincided with an unprecedented bull market for stocks. They have also coincided with increasingly frequent arguments from academics and practitioners that CEO pay is excessive. Academics in particular point to departures from relative performance evaluation as a major puzzle. Observing that the sensitivity of CEO compensation to market returns is inconsistent with the predictions of principal-agent theory; they have increasingly been tempted to resort to political explanations to explain the compensation of CEOs. The sensitivity of CEO compensation to market returns is not so puzzling, however, when one recognizes the special feature of the labor market for CEOs. The combination talent sorting of CEOs among firms and aggregate shocks that affect the marginal value of CEO services to the firm predicts a positive relationship between CEO pay and aggregate stock market returns. We argue that the supply of highly skilled CEOs capable of running large, complex corporations is relatively inelastic, so shocks to aggregate demand for CEOs simultaneously raise firm value and raise the marginal value of CEO services to the firm. In equilibrium, such shocks bid up the value of their compensation packages. This phenomenon makes it appear as if (some) firms are violating relative performance evaluation. Using Standard and Poor's Execucomp data for a large panel of U.S. firms, we show that the empirical failure of RPE is systematically restricted to the CEOs of certain types of firms. In our data, there is less of a puzzle for the firms in the bottom quartile of the size distribution. The behavior of these firms is in closer accordance with the predictions of agency theory. We interpret this as evidence that the supply of CEOs sufficiently skilled to manage such firms is relatively elastic. The compensation packages for the CEOs of larger, more complex firms, however, require highly skilled CEOs. Empirically, the compensation packages for the CEOs of these firms are more sensitive to aggregate shocks, which we interpret as evidence that the supply of highly skilled CEOs is relatively inelastic. These results are robust to robustness checks against alternative hypothesis such as skimming and strategic considerations. Finally, the paper's findings suggest three extensions to i) analysis rent sharing between CEOs and firms, ii) comparisons of pay-performance sensitivities of CEOs and divisional managers, and iii) studies of cyclical patterns in earnings inequality.

Ineffident Market for CEOs in Health Care

Ineffident Market for CEOs in Health Care