Managerial Entrenchment and the Market for Talent
Review of Corporate Finance Studies. Advance Access published August 19, 2022, https://doi.org/10.1093/rcfs/cfac028
Posted: 14 Feb 2009 Last revised: 22 Aug 2022
Date Written: June 30, 2022
Abstract
This paper studies how the nature of managerial skills affects firms’ governance decisions. As required skills shift from firm specific toward more general abilities, replacing an underperforming CEO with an outside hire becomes more profitable for shareholders. Therefore, firms adopt stronger governance arrangements to limit the entrenchment of incumbent CEOs and exploit the improved opportunities offered by the market for talent. The analysis rationalizes the observed trend toward stronger corporate governance and offers novel empirical predictions concerning the relationship between managerial entrenchment, firm size, and the nature of managerial skills.
Keywords: Managerial skills, managerial entrenchment, corporate governance, managerial labor market.
JEL Classification: D83, D86, G34
Suggested Citation: Suggested Citation