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CEO-Firm Match Quality, Entrenchment, and the Relation Between CEO Tenure and Firm Value

61 Pages Posted: 3 Jul 2015 Last revised: 20 Aug 2017

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: August 19, 2017

Abstract

Models that consider the interaction of the quality of the CEO-firm match and CEO entrenchment make different predictions for the relation between CEO tenure and firm value. We examine this relation empirically and provide evidence that the value of the average S&P 1500 company exhibits a hump-shaped relation with CEO tenure. This result is robust to various robustness tests and supported by announcement returns to sudden CEO deaths and takeovers. Most important, the hump shape is subject to meaningful cross-sectional variation: firm value starts to decline after fewer/more years of CEO tenure depending on the level of i) exogenous CEO entrenchment, ii) industry dynamics, which alter CEO-firm match quality, and iii) CEOs’ adaptability to changes. The results are most consistent with a deteriorating CEO-firm match in conjunction with increasing entrenchment, which cause a decline in firm value over the later years of tenure for CEOs who were good initial matches.

Keywords: CEO adaptability, CEO-firm match, CEO tenure, entrenchment, environmental dynamics, firm value

JEL Classification: G30, G34, J24

Suggested Citation

Limbach, Peter and Schmid, Markus and Scholz-Daneshgari, Meik, CEO-Firm Match Quality, Entrenchment, and the Relation Between CEO Tenure and Firm Value (August 19, 2017). 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

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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