CEO Performance in Severe Crises: The Role of Newcomers

37 Pages Posted: 5 Nov 2018

See all articles by Sharmin Sazedj

Sharmin Sazedj

Bank of Portugal; New University of Lisbon - Nova School of Business and Economics

João Amador

Bank of Portugal

José Tavares

Nova School of Business and Economics - Universidade Nova de Lisboa ; Centre for Economic Policy Research (CEPR)

Date Written: November 2018

Abstract

A firm's optimal choice of a CEO involves a trade-off between hiring newcomers - who take time to profit from learning by doing - and avoiding CEO turnover or opting for internal successions - risking that the old guard fall prey to an experience trap, repeating the same old business practices. When firms are hit by an aggregate economic shock, exogenous, unexpected, and unprecedented in nature, reach, magnitude and persistence, conducting 'business as usual' no longer applies and having in office a newcomer - a CEO hired recently from another firm - may turn out to be particularly valuable to efficiently abandon old management practices. We use a unique matched firm-employee dataset for Portuguese firms in the wake of the last economic crisis, to estimate the value of a newcomer CEO, who is by nature prone to avoid the experience trap. During the crisis, firms run by newcomer CEOs outperform those run by high tenured and/or internally promoted CEOs in terms of both value added (GVA) and sales. We estimate a performance gap of approximately 18%, and confirm that no such gap exists prior to the crisis. Firms managed by newcomers are also less likely to fail during the crisis. Propensity core matching confirms our difference-in-differences results. Our findings are robust to different measures of firm performance, across different samples and specifications, and to the inclusion of several CEO and firm controls, including fixed effects. Finally, we show that newcomer CEOs make different decisions in terms of personnel, expenditure, investment and international trade, attaining higher productivity levels.

Keywords: CEO tenure, firm performance, great recession

JEL Classification: G34, J24, L25

Suggested Citation

Sazedj, Sharmin and Amador, João and Tavares, José, CEO Performance in Severe Crises: The Role of Newcomers (November 2018). CEPR Discussion Paper No. DP13294, Available at SSRN: https://ssrn.com/abstract=3278669

Sharmin Sazedj

Bank of Portugal

Rua Francisco Ribeiro, 2
Lisbon, 1150-165
Portugal

New University of Lisbon - Nova School of Business and Economics

Campus de Campolide
Lisbon, 1099-032
Portugal

João Amador (Contact Author)

Bank of Portugal ( email )

Rua Francisco Ribeiro, 2
Lisbon, 1150-165
Portugal

José Tavares

Nova School of Business and Economics - Universidade Nova de Lisboa

Campus de Carcavelos
Rua da Holanda, 1
Lisboa, 2775-405
Portugal
+351 21 380 1669 (Phone)
+351 21 388 9073 (Fax)

HOME PAGE: http://josetavares.pt

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

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