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
Date Written: August 19, 2017
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
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