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Managerial Legacies, Entrenchment, and Strategic Inertia

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  • CATHERINE CASAMATTA
  • ALEXANDER GUEMBEL

Abstract

This paper argues that the legacy potential of a firm's strategy is an important determinant of CEO compensation, turnover, and strategy change. A legacy makes CEO replacement expensive, because firm performance can only partially be attributed to a newly employed manager. Boards may therefore optimally allow an incumbent to be entrenched. Moreover, when a firm changes strategy it is optimal to change the CEO, because the incumbent has a vested interest in seeing the new strategy fail. Even though CEOs have no specific skills in our model, legacy issues can explain the empirical association between CEO and strategy change. Copyright (c) 2010 the American Finance Association.

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Article provided by American Finance Association in its journal The Journal of Finance.

Volume (Year): 65 (2010)
Issue (Month): 6 (December)
Pages: 2403-2436

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Handle: RePEc:bla:jfinan:v:65:y:2010:i:6:p:2403-2436

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Cited by:
  1. Ronald W. Anderson & M. Cecilia Bustamante & Stéphane Guibaud, 2012. "Agency, Firm Growth, and Managerial Turnover," FMG Discussion Papers dp711, Financial Markets Group.
  2. Ronald W. Anderson & Maria Cecilia Bustamante & Stéphane Guibaud, 2012. "Agency, firm growth, and managerial turnover," LSE Research Online Documents on Economics 43144, London School of Economics and Political Science, LSE Library.
  3. Dow, James, 2013. "Boards, CEO entrenchment, and the cost of capital," Journal of Financial Economics, Elsevier, vol. 110(3), pages 680-695.

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