Climbing the Corporate Ladder: Whom Do Highly Skilled CEOs Work For?

Abstract

In this paper, we examine whether inside directors improve the CEO hiring process. Using a novel measure of managerial talent, we show that firms with inside directors hire more talented CEOs. This effect is particularly pronounced when hiring an outside CEO, when inside directors have stronger reputation incentives, and when insiders are likely to have more influence on board decisions. We employ a number of tests to explore the extent to which screening versus shareholder-manager agency problems can explain our results. Overall, our evidence suggests that inside directors play an important screening role in the CEO hiring process.

Keywords: executive directors, inside directors, CEOs, talent, human capital, board of directors

JEL Classification: G30, G34