How Do CEOs Create Value for Their Firms?
Varouj A. Aivazian
University of Toronto - Rotman School of Management
Copenhagen Business School - Department of Economics
Mohammad M. Rahaman
Saint Mary's University - Sobey School of Business
March 7, 2011
Do CEOs really matter for firm performance? And if they do, how does CEO human capital translate into firm value? We investigate these questions using a sample of firms with CEO turnover. We find that when a CEO with more general managerial human capital is matched with a firm relying more on such skills, the firm reduces leverage and invests less in intangibles, relative to firms relying on CEOs with more firm-specific skills. These changes in firm financing and investment policies lower business risk and reduce the costs associated with financial distress, which, in turn, manifest into higher firm value. Our results suggest that CEOs do matter for firm performance, and illustrate possible channels through which CEO human capital can translate into higher firm value.
Number of Pages in PDF File: 36
Keywords: CEO Turnover, CEO Human Capital, Firm Policy, Firm Performance
JEL Classification: G30, J40
Date posted: August 10, 2010 ; Last revised: March 8, 2011
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