What Matters in Managerial Private Benefits? Evidence from Natural Experiments

Abstract

To examine the impact of managerial private benefits on firm value, I construct a private benefits index (PB) composed of four dimensions: empire building, enjoying the quiet life, nepotism, and tunneling. Using the sudden deaths of 254 CEOs from 1955 to 2019, I document several novel findings. First, on average, stock prices [CAR (-1,2)] increase by 1.79% around the sudden death of disloyal CEOs but decrease by 3.22% for loyal CEOs. Second, tunneling is the most prevalent private benefit and receives more substantial backlash than empire building, enjoying the quiet life, and nepotism. Third, nepotism is associated with a decrease in firm value for large firms but does not affect small firms. These results have important implications for resource allocation in the capital market and the economy, in addition to compensation and turnover of CEOs.

Keywords: private benefits, empire building, enjoying the quiet life, nepotism, tunneling, firm value

JEL Classification: G30, G32, G34, K22