How Do Corporate Boards Learn About CEO Ability? Evidence from Structural Estimation

45 Pages Posted: 12 Dec 2014

See all articles by Christian von Drathen

Christian von Drathen

University of Texas at Dallas - Naveen Jindal School of Management

Date Written: November 2014

Abstract

CEO ability is an important determinant of firm performance but is usually not directly observable. I use simulated method of moments (SMM) in order to estimate a dynamic model of learning about CEO ability from the firm’s stock market valuations, operating returns, and CEO turnover. This model features an information asymmetry between the firm’s board of directors and the stock market, as well as misalignment between the board and shareholders. I find that learning about CEO ability is influenced by the stock market’s public signal, the board’s private signal, and operating returns in a ratio of 2.3 : 2.1 : 1. When learning about CEO ability corporate boards rely mostly on public stock market information and inside information available only to the board, but are less concerned with accounting data.

Suggested Citation

von Drathen, Christian, How Do Corporate Boards Learn About CEO Ability? Evidence from Structural Estimation (November 2014). Available at SSRN: https://ssrn.com/abstract=2536655 or http://dx.doi.org/10.2139/ssrn.2536655

Christian Von Drathen (Contact Author)

University of Texas at Dallas - Naveen Jindal School of Management ( email )

P.O. Box 830688
Richardson, TX 75083-0688
United States

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