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Managerial Legacies, Entrenchment and Strategic InertiaCatherine CasamattaTSE-University of Toulouse 1 Alexander GuembelUniversity of Toulouse 1 - Toulouse School of Economics (TSE) March 25, 2010 Journal of Finance, Forthcoming AFA 2006 Boston Meetings Paper Abstract: 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 working papers seriesDate posted: March 24, 2005 ; Last revised: March 27, 2010Suggested Citation |
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