42 Pages Posted: 12 Oct 2005
Date Written: September 1, 2005
The extent to which CEOs influence firm performance is fundamental to scholarly understanding of how organizations work; yet, this linkage is poorly understood. Previous empirical efforts to examine the link between CEOs and firm performance using variance decomposition, while provocative, nevertheless suffer from methodological problems that systematically understate the relative impact of CEOs on firm performance compared to industry and firm effects. This paper identifies and corrects these methodological problems and then re-examines the percentage of the variance in firm performance explained by heterogeneity in CEOs. When correctly estimated, the "CEO effect" on corporate-parent performance is substantially more important than that of industry and firm effects, but only moderately more important than industry and firm effects on business-segment performance.
Keywords: CEO, firm performance, leadership effects
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