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Learning About CEO Ability and Stock Return Volatility

Author

Listed:
  • Yihui Pan
  • Tracy Yue Wang
  • Michael S. Weisbach

Abstract

Consistent with predictions from a stylized Bayesian learning model stock return volatility declines with CEO tenure in a convex manner, even for CEOs whose appointments occur for exogenous reasons. The decline is faster when there is higher uncertainty about the CEO's ability when there is more transparency about the firm's prospects, and when CEO ability is more important in value creation. We quantify the importance of uncertainty about CEO ability relative to the firm's fundamental cash flow uncertainty in contributing to stock return volatility, highlighting the importance of management in creating value.

Suggested Citation

  • Yihui Pan & Tracy Yue Wang & Michael S. Weisbach, 2015. "Learning About CEO Ability and Stock Return Volatility," The Review of Financial Studies, Society for Financial Studies, vol. 28(6), pages 1623-1666.
    • Handle: RePEc:oup:rfinst:v:28:y:2015:i:6:p:1623-1666.
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    File URL: http://hdl.handle.net/10.1093/rfs/hhv014
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    JEL classification:

    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance
    • M12 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Business Administration - - - Personnel Management; Executives; Executive Compensation
    • M51 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Personnel Economics - - - Firm Employment Decisions; Promotions

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