CEO Tenure and Firm Value

74 Pages Posted: 3 Jul 2015 Last revised: 30 Jan 2019

See all articles by Francois Brochet

Francois Brochet

Boston University - Department of Accounting

Peter Limbach

University of Cologne and Centre for Financial Research (CFR)

Markus Schmid

University of St. Gallen - Swiss Institute of Banking and Finance; University of St. Gallen - School of Finance

Meik Scholz-Daneshgari

Karlsruhe Institute of Technology

Date Written: January 28, 2019

Abstract

Our study is the first to provide systematic evidence of a hump-shaped CEO tenure-firm value relation. This pattern is supported by announcement returns to sudden CEO deaths, which mitigate endogeneity concerns. Furthermore, the hump shape is subject to meaningful cross-sectional variation: firm value starts to decline after fewer years of CEO tenure i) in more dynamic industries, in which the optimal CEO-firm match changes more frequently, ii) if CEOs are less adaptable to changes, iii) if CEO entrenchment is higher. Lastly, financial reporting quality also follows a hump shape while earnings smoothing increases over CEO tenure, suggesting that CEOs entrench themselves by obfuscating their declining performance. While we find evidence suggesting optimal retention by boards on average, some CEOs stay past their “peak”, primarily because of a deteriorating CEO-firm match in conjunction with increasing entrenchment.

Keywords: CEO adaptability, corporate governance regulation, entrenchment, environmental dynamics, financial reporting quality, firm value

JEL Classification: G30, G34, J24

Suggested Citation

Brochet, Francois and Limbach, Peter and Schmid, Markus and Scholz-Daneshgari, Meik, CEO Tenure and Firm Value (January 28, 2019). Paris December 2015 Finance Meeting EUROFIDAI - AFFI; University of St.Gallen, School of Finance Research Paper No. 2015/11. Available at SSRN: https://ssrn.com/abstract=2626340 or http://dx.doi.org/10.2139/ssrn.2626340

Francois Brochet

Boston University - Department of Accounting ( email )

595 Commonwealth Avenue
Boston, MA 02215
United States

Peter Limbach (Contact Author)

University of Cologne and Centre for Financial Research (CFR) ( email )

Albertus-Magnus-Platz
Köln, 50923
Germany

HOME PAGE: http://www.finance.uni-koeln.de

Markus Schmid

University of St. Gallen - Swiss Institute of Banking and Finance ( email )

Rosenbergstrasse 52
St. Gallen, 9000
Switzerland

University of St. Gallen - School of Finance ( email )

Unterer Graben 21
St.Gallen, CH-9000
Switzerland

Meik Scholz-Daneshgari

Karlsruhe Institute of Technology ( email )

Kaiserstraße 12
Karlsruhe, Baden Württemberg 76128
Germany

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