31 Pages Posted: 14 Feb 2009 Last revised: 6 Jun 2016
Date Written: June 4, 2016
This paper studies how the generality of managerial skills affects firms' governance decisions. As managerial skills become less firm-specific and more portable across firms, the market for talent offers better opportunities for replacing an incumbent chief executive officer (CEO) with an external hire. This results in higher pay in the market, but, overall, the profitability of an external appointment increases in large firms, where managerial talent is most productive. As a consequence, large firms limit the entrenchment of incumbent managers to take advantage of the improved replacement opportunities offered by the market. The analysis rationalizes the recent trend toward stronger corporate governance and offers novel empirical predictions concerning the relationship between managerial entrenchment, firm size and the generality of managerial skills.
Keywords: Managerial entrenchment, corporate governance, managerial labor market
JEL Classification: D83, D86, G34
Suggested Citation: Suggested Citation