Managerial Ability and Firm Value: A New Perspective

Abstract

Using a sample of U.S. firms over three decades, we examine whether the efficiency with which managers generate revenue has an impact on firm value. We find that managerial ability is positively related to firm value such that one standard deviation increase in ability is associated with a 5.7% increase in firm value relative to the mean level. Importantly, by exploiting exogenous CEO turnover, we establish causality between managerial ability and firm value. Moreover, this link is more pronounced in the presence of corporate governance mechanisms, such as institutional investors and financial analysts. We also document a reduction in value-destroying practices, such as earnings management, in firms with more efficient managers.

Keywords: Managerial Ability, Firm Value, Corporate Governance, CEO Turnover

JEL Classification: G30, G32, M12