How Much are Differences in Managerial Ability Worth?

Posted: 7 Jul 1997

See all articles by Rachel M. Hayes

Rachel M. Hayes

University of Utah - David Eccles School of Business

Scott Schaefer

University of Utah - Department of Finance

Multiple version iconThere are 2 versions of this paper

Date Written: March 1997

Abstract

We attempt to measure how much differences in managerial ability can affect firms' values. If transaction costs or firm specific human capital prevent the firm and CEO from recontracting to the CEO's market wage, then the value of the firm will depend on the continued employment of the CEO. Applying Lazear's (1986) model of raids in the managerial labor market, we argue that only high ability executives are bid away by other firms. By comparing the abnormal returns associated with loss of an executive to another firm with those associated with loss of an executive by sudden death, we derive a measure of the relative contributions to the value of the firm (net of wages) of high vs. average ability managers. We find positive abnormal returns in response to sudden executive death and negative abnormal returns in response to top executives being bid away by another firm. In addition, we find a negative event response when an executive is bid away by a larger firm and a positive event response when managers leave for smaller firms. This finding is consistent with Rosen's (1982) hypothesis of a complementarity between firm size and managerial ability.

JEL Classification: J24, J41

Suggested Citation

Hayes, Rachel M. and Schaefer, Scott, How Much are Differences in Managerial Ability Worth? (March 1997). Available at SSRN: https://ssrn.com/abstract=8532

Rachel M. Hayes (Contact Author)

University of Utah - David Eccles School of Business ( email )

1645 E Campus Center Dr
Salt Lake City, UT 84112-9303
United States

Scott Schaefer

University of Utah - Department of Finance ( email )

David Eccles School of Business
Salt Lake City, UT 84112
United States

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