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CEO Ability, Pay, and Firm Performance

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Author Info

  • Yuk Ying Chang

    ()
    (School of Economics and Finance, College of Business, Massey University, Wellington 6021, New Zealand)

  • Sudipto Dasgupta

    ()
    (Department of Finance, Hong Kong University of Science and Technology, Clear Water Bay, Kowloon, Hong Kong)

  • Gilles Hilary

    ()
    (Department of Accounting, Hong Kong University of Science and Technology, Clear Water Bay, Kowloon, Hong Kong; and Department of Accounting, HEC Paris, 78350 Jouy-en-Josas Cedex, France)

Abstract

Do chief executive officers (CEOs) really matter? Do cross-sectional differences in firm performance and CEO pay reflect differences in CEO ability? Examining CEO departures over 1992-2002, we first find that the stock price reaction upon departure is negatively related to the firm's prior performance and to the CEO's prior pay. Second, the CEO's subsequent labor market success is greater if the firm's predeparture performance is better, the prior pay is higher, and the stock market's reaction is more negative. Finally, better prior performance, higher prior pay, and a more negative stock market reaction are associated with worse postdeparture firm performance. Collectively, these results reject the view that differences in firm performance stem entirely from non-CEO factors such as the firms' assets, other employees, or "luck," and that CEO pay is unrelated to the CEO's contribution to firm value.

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File URL: http://dx.doi.org/10.1287/mnsc.1100.1205
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Bibliographic Info

Article provided by INFORMS in its journal Management Science.

Volume (Year): 56 (2010)
Issue (Month): 10 (October)
Pages: 1633-1652

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Handle: RePEc:inm:ormnsc:v:56:y:2010:i:10:p:1633-1652

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Keywords: CEO ability; CEO pay; managerial labor market; firm performance;

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Cited by:
  1. Alex Edmans & Xavier Gabaix, 2010. "Risk and the CEO Market: Why Do Some Large Firms Hire Highly-Paid, Low-Talent CEOs?," NBER Working Papers 15987, National Bureau of Economic Research, Inc.
  2. Custódio, Cláudia & Ferreira, Miguel A. & Matos, Pedro, 2013. "Generalists versus specialists: Lifetime work experience and chief executive officer pay," Journal of Financial Economics, Elsevier, vol. 108(2), pages 471-492.
  3. Bebchuk, Lucian A. & Cremers, K.J. Martijn & Peyer, Urs C., 2011. "The CEO pay slice," Journal of Financial Economics, Elsevier, vol. 102(1), pages 199-221, October.
  4. Aktas, Nihat & de Bodt, Eric & Roll, Richard, 2013. "Learning from repetitive acquisitions: Evidence from the time between deals," Journal of Financial Economics, Elsevier, vol. 108(1), pages 99-117.
  5. Albuquerque, Ana M. & De Franco, Gus & Verdi, Rodrigo S., 2013. "Peer choice in CEO compensation," Journal of Financial Economics, Elsevier, vol. 108(1), pages 160-181.
  6. Edmans, Alex & Gabaix, Xavier, 2010. "Risk and CEO Market: Why Do Some Large Firms Hire Highly-Paid, Low-Talent CEOs?," Working Papers 10-17, University of Pennsylvania, Wharton School, Weiss Center.

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