CEO Reputation Research Articles

Delegated Monitoring: When Can Boards Rely on Outside Experts?

This paper provides a theoretical model to examine when and how boards of directors can utilize outside experts who provide second opinions to assist them in 1) monitoring managers with career concerns, and 2) approving firm investments. Because an agreeable second opinion serves as a signaling mechanism, when such opinions are credible, policies mandating the use of experts are unnecessary as managers will choose to seek out second opinions on their own. Mandates can be counterproductive however when second opinions are not credible, unduly elevating the status of costly second opinions that always agree with management recommendations. In the absence of incentives for truthful disclosure, it is better for boards to forgo efforts to monitor and require management and experts to pool their recommendations. This paper is a simplified version of Gatekeepers and CEO Reputation, available at http://ssrn.com/abstract=1393582.

The effect of CEO reputation and explanations for poor performance on investors’ judgments about the company’s future performance and management

Two experiments are conducted in which MBA students make judgments about a company’s future performance and management’s reputation after the company reports poor financial results. Information about the CEO’s pre-existing reputation is manipulated at three levels (favorable, unfavorable, or none) and the plausibility of management’s explanation is manipulated at two levels (plausible or implausible). Generally, the results indicate that management’s explanations influence investors’ judgments of the company’s future performance and that judgments about management were jointly influenced by both manipulated factors. Specifically, our results indicate that a pre-existing favorable management reputation is an enduring trait that is not damaged even when management offers an implausible explanation. Our results are consistent with Mercer (2004) but inconsistent with other research ( Janoff-Bulman, 1992; Meyerson, Weick, & Kramer, 1996) suggesting that a good reputation is easily lost. Our results also indicate that offering a plausible explanation improves the reputation of managers with an unfavorable reputation. We also find that judgments about management’s intentions for explaining poor performance represent a partial mediator for judgments about management’s reputation. Finally, we provide evidence that judgments about the company’s future performance and management’s reputation are consequential in that they are associated with investors’ equity judgments.

The Impact of CEO Reputation: Negative News and Economic Decisions

In this true experiment the impact of a negative news story about a CEO is measured on the purchasing decisions and potential employment decisions of a college-age demographic. The age group tested is the #1 purchaser of the stimulus product, an MP3 player; additionally, these primarily juniors and seniors are interested in future employment and job searching issues. Findings support that CEO reputation is of critical importance to economic decisions among the age cohort. Negative news has profoundly adverse effect, while positive news, while pleasant to read, has a negligible impact. Public relations implications for managing a CEO's reputation are discussed.

CEO Reputation and Earnings Quality*

We examine the association between CEO reputation (proxied by the extent of press coverage) and the quality of the firm’s earnings (proxied by two accruals-based measures). We test three explanations for an association between these constructs: the efficient contracting hypothesis suggests that reputed CEOs are associated with good earnings quality, while the rent extraction and matching explanations argue that reputed CEOs are associated with poor earnings quality. Using a simultaneous equations system to capture the endogeneity of the constructs, we find (consistent with the rent extraction and matching arguments) that more reputed CEOs are associated with poorer earnings quality than are less-reputed CEOs. Further tests find little support for the rent extraction hypothesis. We conclude that the reason more reputed CEOs are associated with poor earnings quality firms is that such firms require more talented managers and, therefore, employ more reputed CEOs.

Discussion of “CEO Reputation and Earnings Quality”*

Discussion of “CEO Reputation and Earnings Quality”*

CEO Reputation and Corporate Governance

This study examines how the level of CEO reputation affects the strength of corporate governance across firms. Using CEO press coverage and three-year industry-adjusted firm stock performance as CEO reputation proxies, I find that when a CEO's reputation is higher, her firm exhibits weaker corporate governance. This study contributes to the literature by providing evidence that CEO attributes influence corporate governance and that governance can be regarded as endogenous and multi-dimensional. In addition, it aids our understanding of the observed heterogeneity in the strength of corporate governance across firms.

Does one hat fit all? The case of corporate leadership structure

Recent corporate scandals have led to renewed campaigns for governance reforms, including calls for the separation of CEO and chairman positions. This paper argues that this trend ignores the possibility that differences in firm characteristics determine the appropriateness of separating or combining the two positions. I propose and test hypotheses on the determinants of leadership structure using a sample of 1,883 firms. I find that organizational complexity, CEO reputation, and managerial ownership increase the probability of CEO duality. I also find that whether CEO duality benefits or hurts the firm is contingent on firm and CEO characteristics. These results suggest that firms do consider the costs and benefits of alternative leadership structures, and that requiring all firms to separate CEO and chairman duties may be counterproductive.

The costs and benefits of CEO reputation

The costs and benefits of CEO reputation

CEO Reputation: Who Benefits - The Firm and the CEO?

I examine the potential economic value of CEO reputation: performance improvement at the firm level and job retention benefits to the CEO. Two perspectives on CEO reputation offer different predictions regarding the benefits of CEO reputation. The ability perspective in the agency literature advocates the economic benefits of CEO reputation. The symbolic image perspective from recent CEO reputation studies, however, argues that CEO reputation does not necessarily improve firm performance or CEO job retention. I investigate which perspective is more consistent with empirical evidence. The results of firm performance tests show that CEOs with well-established reputations are able to sustain good firm performance but do not turn around poor performance in the near term. These results imply that stakeholders might have to consider replacing the CEO - no matter how highly regarded - with a turnaround specialist when a firm suffers financially. Another finding from job security tests shows that CEOs with high reputation are more likely to be dismissed than CEOs with low reputation when they perform poorly. These results suggest that the reputations of CEOs through promoting their own images in the media do not necessarily secure their job titles.

CEO Reputation and Corporate Governance*

CEO Reputation and Corporate Governance*

CEO Reputation and the Relative Use of Earnings- and Stock-Based Performance Measures in CEO Evaluation*

CEO Reputation and the Relative Use of Earnings- and Stock-Based Performance Measures in CEO Evaluation*

Marketing the Image of Management:: The Costs and Benefits of CEO Reputation

Marketing the Image of Management:: The Costs and Benefits of CEO Reputation

CEO Reputation and Earnings Quality

We examine the association between CEO reputation (proxied by the extent of press coverage) and the quality of the firm's earnings (proxied by two accruals-based measures). We test three explanations for an association between these constructs: the efficient contracting hypothesis suggests that reputed CEOs are associated with good earnings quality, while the rent extraction and matching explanations argue that reputed CEOs are associated with poor earnings quality. Using a simultaneous equations system to capture the endogeneity of the constructs, we find (consistent with the rent extraction and matching arguments) that more reputed CEOs are associated with poorer earnings quality than are less-reputed CEOs. Further tests find little support for the rent extraction hypothesis. We conclude that the reason more reputed CEOs are associated with poor earnings quality firms is that such firms require more talented managers and, therefore, employ more reputed CEOs.

CEO and ethical reputation: visionary or mercenary?

This study examines the relationship between ethical reputation, CEO compensation and firm performance for the top corporate citizens as rated by Business Ethics magazine. The results show that there was not a direct relationship between CEO compensation and firm performance, that a high level of CEO compensation combined with a high ethical reputation did not impact the financial performance of the firm, and firms with a high ethical reputation had only average financial results, while firms with low ethical reputations displayed both high and low financial performance. Furthermore, CEOs of unfirms had, on average, higher compensation levels than firms that were profitable. These findings bring useful inputs for CEO on how they can justify high levels of compensation even during periods when the firm is not profitable or has a low level of profitability. An interesting sidelight of the study is that three CEOs in the sample whose firms were profitable did not accept any compensation during 2002, probably because the financial performance was below expectations.

Does One Hat fit All? The Case of Corporate Leadership Structure

Recent corporate scandals have led to renewed campaigns for governance reforms, including calls for the separation of CEO and chairman positions. This paper cautions that the push toward a common corporate leadership structure may be detrimental if differences in individual organizational circumstances affect the appropriateness of separating or combining chairman and CEO duties. I propose three hypotheses on firm characteristics that might explain leadership structure choice and test these hypotheses on a sample of 2,166 firms. I find that organizational complexity and CEO reputation increase the probability of vesting the two positions in the same individual. Similarly, CEO duality is more likely when insider ownership is relatively large and the board is small. These results suggest that firms do consider the costs and benefits of alternative leadership structures and that pushing all firms to separate CEO and chairman duties may be counterproductive.

CEO Reputation: A Key Factor in Shareholder Value

You need not look further than the morning newspaper or evening news to observe the tremendous influence of CEO reputations on shareholder value. Whether it is through a stock transaction, a response to a crisis, or the creation of a best-in-the-industry talent pool, a CEO's reputation plays a significant role in determining how both internal and external audiences evaluate — and ultimately respond to — a company. This article will discuss the greater impact of CEO reputation, in light of the increased expectations of stakeholders, the proliferation of communication channels, and the demand for a broader content of messages that CEOs are delivering to their constituencies. Combined, these factors are expanding the role of today's CEO as we know it, making CEO reputation an even more critical ingredient to a company's success.

The Impact of Product Recalls on the Wealth of Sellers

What happens to the wealth of shareholders of firms producing defective products? Our answer-for producers of drugs and autos that were recalled from the market-is that the shareholders bear large losses. They are substantially greater than the costs directly emanating from the recall-for example, costs of destroying or repairing defective products. In fact, they are plausibly larger than all the costs attributable specifically to the recalled product; the losses spill over to the firm's "goodwill." They also spill over to competitors. This negative externality may even be larger in the aggregate than the losses to the producer of the recalled product.