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Managerial Legacies, Entrenchment and Strategic Inertia

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  • Casamatta, Catherine
  • Guembel, Alexander

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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Paper provided by Institut d'Économie Industrielle (IDEI), Toulouse in its series IDEI Working Papers with number 442.

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Date of creation: Jan 2007
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Publication status: Published in The Journal of Finance, vol.�65, n°6, décembre 2010, p.�2403-2436.
Handle: RePEc:ide:wpaper:6747

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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. Dow, James, 2013. "Boards, CEO entrenchment, and the cost of capital," Journal of Financial Economics, Elsevier, vol. 110(3), pages 680-695.
  3. 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.

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