CEO Successions and Firm Performance in the US Financial Industry

37 Pages Posted: 8 Jan 2013

See all articles by Antonio Falato

Antonio Falato

Board of Governors of the Federal Reserve System

Dalida Kadyrzhanova

Georgia State University

Date Written: November 1, 2012

Abstract

This paper examines the labor market for CEOs in the financial sector from 1988 to 2007, using a new hand-collected sample of 1,655 CEO successions. We document that there is a significant role of outside successions, as about one out of two successions involves an outside hire. In addition, using difference-in-differences estimates, we study the link between the labor market for finance CEOs and firm performance. We document that (1) there is a large performance gap between inside and outside successions, as outside successions are followed by significantly larger improvements in firm performance; (2) the performance gap between outside and inside successions is larger for firms with an insider dominated board of directors; (3) the performance gap widened after an important deregulation event (the 1999 Gramm-Leach-Bliley Act). These results are robust to using a battery of firm performance measures (short-run and long-run stock market returns, and several long-run operating performance measures) and a matched sample approach to address selection issues. Overall, our findings suggest that managerial human capital is very valuable in the financial industry, and weak internal governance hurts firm performance by limiting the scope of labor market competition.

Keywords: CEO labor market, corporate governance of financial firms

JEL Classification: G20, G34

Suggested Citation

Falato, Antonio and Kadyrzhanova, Dalida, CEO Successions and Firm Performance in the US Financial Industry (November 1, 2012). FEDS Working Paper No. 2012-79. Available at SSRN: https://ssrn.com/abstract=2197497 or http://dx.doi.org/10.2139/ssrn.2197497

Antonio Falato (Contact Author)

Board of Governors of the Federal Reserve System ( email )

20th & C. St., N.W.
Washington, DC 20551
United States

Dalida Kadyrzhanova

Georgia State University ( email )

J Mack Robinson College of Business
35 Broad St, 12th Floor
Atlanta, GA 30303-3083
United States

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