The Determinants and Impact of Executive-Firm Matches

I estimate a model of executive-firm matching, in which both components of the executive labor market outcome—the assignment of managers to firms and the cross-sectional distribution of executive pay—are endogenously determined. Results in this paper reveal the importance of match specificity in productivity, driven by complementarities between firm and manager attributes. Therefore, one reason that larger, more diversified, research-intensive firms pay their executives more is because they are assortatively matched with managers that are talented, have more cross-industry experience, and are prone to innovation. More important, they outbid competing firms for these managers because they enjoy higher marginal productivity from given managerial skills. Announcement abnormal returns and executive tenure duration are both higher for matches with higher estimated productivity, suggesting mutual benefits for both the firms and the managers from assortative matching.