CEOs

Paper Session

Friday, Jan. 6, 2017 2:30 PM – 4:30 PM

Sheraton Grand Chicago, Chicago Ballroom IX
Hosted By: American Finance Association
  • Chair: Charles Hadlock, Michigan State University

Good and Bad CEOs

Dirk Jenter
,
London School of Economics and Political Science
Egor Matveyev
,
University of Alberta
Lukas Roth
,
University of Alberta

Abstract

This paper analyzes changes in shareholder value and firm performance caused by deaths of incumbent CEOs. We find that CEOs are an important determinant of shareholder value for many firms. The value effects of CEO deaths are heterogeneous. Most sudden deaths, and especially sudden deaths of young and short-tenured CEOs, cause large value losses. Other CEO deaths – non-sudden deaths, and sudden deaths of old and long-tenured CEOs – are on average associated with large value gains. The evidence suggests that many CEO-firm matches generate large surpluses that benefit shareholders. Many other CEOs, however, are either not the optimal match or overpaid.

Compensation Goals and Firm Performance

Ben Bennett
,
Air Force Institute of Technology
Carr Bettis
,
Arizona State University
Radhakrishnan Gopalan
,
Washington University-St. Louis
Todd Milbourn
,
Washington University-St. Louis

Abstract

Using a large dataset of performance goals employed in executive incentive contracts we find that a disproportionately large number of firms exceed their goals by a small margin as compared to the number that fall short of the goal by a similar margin. This asymmetry is particularly acute for earnings and profit goals, when compensation is contingent on a single goal and is present for both long-term and short-term goals, when the pay-for-performance relationship is concave or convex and for grants with cash or stock payout. Firms that exceed their compensation target by a small margin are more likely to beat the target the next period and CEOs of firms that miss their targets are more likely to experience a forced turnover. Firms that just exceed their EPS goals have higher abnormal accruals and lower Research and Development (R&D) expenditures and firms that just exceed their profit goals have lower SG&A expenditures. Overall, our results highlight some of the costs of linking managerial compensation to specific compensation targets.

Executive Job Matching: Estimates from a Dynamic Model

Ruoyan Huang
,
University of Hong Kong

Abstract

I evaluate how firms' and CEOs' learning about their fit with one another affects CEO turnover and compensation decisions. Building and estimating a dynamic model of the executive labor market, I find that learning and selection eliminate low-quality matches and provide explanatory power for the excess skewness of CEO compensation in the data after controlling for firm and CEO characteristics. I further establish that learning generates a hump-shaped hazard rate curve of CEO turnover conditional on CEO tenure. Using a hand-collected dataset of CEO turnover, I discover that the speed and precision of learning determine the level and length of the "discovery phase" of the conditional hazard rate curve. I also find that CEO compensation demonstrates a firm's evaluation of the match quality and is predictive of the expected future tenure of its CEO. In short, I demonstrate the importance of learning and selection in explaining the relations between CEO compensation, CEO turnover, and firm performance.
Discussant(s)
Heitor Almeida
,
University of Illinois-Urbana-Champaign
Daniel Bergstresser
,
Brandeis University
Jordan Nickerson
,
Boston College
JEL Classifications
  • G3 - Corporate Finance and Governance