Managerial Legacies, Entrenchment and Strategic Inertia
TSE-University of Toulouse 1
Toulouse School of Economics, University of Toulouse Capitole
March 25, 2010
Journal of Finance, Forthcoming
AFA 2006 Boston Meetings Paper
This paper argues that the legacy potential of a firm's strategy is an important determinant of CEO compensation, turnover and strategy change. A legacy makes CEO replacement expensive, because firm performance can only partially be attributed to a newly employed manager. Boards may therefore optimally allow an incumbent to be entrenched. Moreover, when a firm changes strategy it is optimal to change the CEO, because the incumbent has a vested interest in seeing the new strategy fail. Even though CEOs have no specific skills in our model, it can explain the empirical association between CEO and strategy change.
Number of Pages in PDF File: 47
Keywords: Reputational concerns, CEO turnover, compensation
JEL Classification: D82, G30, J33
Date posted: March 24, 2005 ; Last revised: March 27, 2010
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