CEO Tenure and Stock Returns Performance

45 Pages Posted: 28 Jan 2018

See all articles by Minhao Leong

Minhao Leong

The University of Sydney

Xianzhen Chen

The University of Sydney, Business School, Discipline of Finance, Students

Xinyuan Yao

PwC Germany; Strategy&

Date Written: January 12, 2018

Abstract

This study shows that CEO tenure has positive and robust predictive power on cross-sectional stock returns. We show that a hedge portfolio constructed based on CEO tenure yields an annualised alpha of 1.32% and attribute this to seasoned CEOs having greater firm-specific knowledge and experience. Consistent with this explanation, we find that CEO tenure has greater incremental impacts on firms with greater information asymmetry. Finally, we also investigate the underlying mechanisms in the tenure–stock returns relationship and find that investors overreact to new CEOs and underreact to seasoned CEOs. In addition, we show that new CEOs rely more heavily on the market trends, whereas seasoned CEOs are more likely to differentiate themselves from their counterparts and rely less on trends in the market. Overall, our findings suggest that CEOs positively influence firm stock returns through greater firm-specific knowledge and experience.

Keywords: CEO Tenure, Asset Pricing, Stock Returns, Information Asymmetry

JEL Classification: G12, G30, J24

Suggested Citation

Leong, Minhao and Chen, Xianzhen and Yao, Xinyuan and Yao, Xinyuan, CEO Tenure and Stock Returns Performance (January 12, 2018). Available at SSRN: https://ssrn.com/abstract=3100746 or http://dx.doi.org/10.2139/ssrn.3100746

Minhao Leong

The University of Sydney ( email )

University of Sydney
Sydney, NSW 2006
Australia

Xianzhen Chen (Contact Author)

The University of Sydney, Business School, Discipline of Finance, Students ( email )

P.O. Box H58
Sydney, NSW 2006
Australia

Xinyuan Yao

Strategy& ( email )

Apollolaan 151
Amsterdam
Netherlands

PwC Germany ( email )

Germany

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