Superstar Chinese CEOs

Abstract

The paper investigates costs and benefits of hiring a star CEO. Using a sample of Chinese listed firms between 2000 and 2010, we find that the appointment of a star CEO is associated with significantly positive cumulative abnormal returns surrounding the announcement day. These findings remain after controlling for other confounding factors that influence the market response to CEO turnover. In addition, we find that star CEOs receive significantly higher executive compensation than their non-star counterparts. Star CEOs also receive more equity incentives compared to non-stars. Our empirical results are robust to controls for other firm and CEO characteristics as well as the endogenous determination of CEO star status. Moreover, we find that firms hiring a star CEO are associated with significantly better short-term market performance than their counterparts in the first year of CEO tenure, while the performance effect gradually attenuates over time. Overall, our results indicate that it is economically rational for Chinese firms to hire a star CEO and the star CEO effect is on top of the CEO’s other measurable human capital and social capital.

Keywords: Star CEO, Executive Compensation, CEO Turnover, China

JEL Classification: G3