CEO Appointments and the Loss of Firm-specific Knowledge - Putting Integrity Back into Hiring Decisions
AbstractA rarely studied trend in corporate governance is the increasing tendency to fill CEO openings through external hires rather than through internal promotions: Kevin J. Murphy and JÃ¡n ZÃ¡bojnÃk (2004) show that the proportion of outside hires has doubled and their pay premium almost quadrupled over the last thirty years. Assuming that general managerial skills are becoming more important relative to firm-specific skills, the authors conclude that competition in the managerial labor market establishes optimal contracts. In our model and our empirical analysis we question this explanation by assuming that over the past decades the dishonesty of the predecessor has become relatively more important for the appointment decisions of firms. We conclude that outside hires are a suboptimal trend because external candidates even step up the regression of integrity in firms: As nobody has an incentive to invest in firm-specific knowledge, not only the performance of firms drops, but also the remaining integrity.
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Bibliographic InfoPaper provided by Center for Research in Economics, Management and the Arts (CREMA) in its series CREMA Working Paper Series with number 2008-27.
Date of creation: Nov 2008
Date of revision:
CEO Appointments; external hires; suboptimal contracts;
Find related papers by JEL classification:
- G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance
- J23 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Labor Demand
- J41 - Labor and Demographic Economics - - Particular Labor Markets - - - Labor Contracts
- M52 - Business Administration and Business Economics; Marketing; Accounting - - Personnel Economics - - - Compensation and Compensation Methods and Their Effects
This paper has been announced in the following NEP Reports:
- NEP-ALL-2008-11-25 (All new papers)
- NEP-CFN-2008-11-25 (Corporate Finance)
- NEP-LAB-2008-11-25 (Labour Economics)
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- Aivazian, Varouj A. & Lai, Tat-kei & Rahaman, Mohammad M., 2013. "The market for CEOs: An empirical analysis," Journal of Economics and Business, Elsevier, vol. 67(C), pages 24-54.
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