CEO Tenure and Firm Value
72 Pages Posted: 3 Jul 2015 Last revised: 23 May 2019
Date Written: May 22, 2019
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. Cross-sectionally, firm value starts to decline after fewer years of CEO tenure in more dynamic industries and if CEOs are less adaptable to changes. Return on assets appears to increase for several years past the firm value turning point, whereas accrual quality declines coincidentally with firm value. In contrast, earnings smoothing and analyst-based earnings surprises increase monotonically over CEO tenure. Combined, those patterns suggest that CEOs attempt to obfuscate their declining performance through reporting discretion. Overall, CEO-firm match quality and CEO adaptability appear to be first-order drivers of the CEO tenure-firm value association, whereas reporting discretion significantly influences accounting-based performance patterns.
Keywords: CEO adaptability, corporate governance regulation, entrenchment, environmental dynamics, financial reporting quality, firm value
JEL Classification: G30, G34, J24
Suggested Citation: Suggested Citation