Working Paper: CEPR ID: DP13294
Authors: Sharmin Sazedj; Joo Amador; Jos Tavares
Abstract: A firm’s optimal choice of a CEO involves a trade-off between hiring newcomers – whotake time to profit from learning by doing – and avoiding CEO turnover or opting forinternal successions – risking that the old guard fall prey to an experience trap, repeatingthe same old business practices. When firms are hit by an aggregate economic shock,exogenous, unexpected, and unprecedented in nature, reach, magnitude and persistence,conducting ‘business as usual’ no longer applies and having in office a newcomer – aCEO hired recently from another firm – may turn out to be particularly valuable toefficiently abandon old management practices. We use a unique matched firm-employeedataset for Portuguese firms in the wake of the last economic crisis, to estimate thevalue of a newcomer CEO, who is by nature prone to avoid the experience trap. Duringthe crisis, firms run by newcomer CEOs outperform those run by high tenured and/orinternally promoted CEOs in terms of both value added (GVA) and sales. We estimate aperformance gap of approximately 18%, and confirm that no such gap exists prior to thecrisis. Firms managed by newcomers are also less likely to fail during the crisis. PropensityScore matching confirms our difference-in-differences results. Our findings are robust todifferent measures of firm performance, across different samples and specifications, andto the inclusion of several CEO and firm controls, including fixed effects. Finally, weshow that newcomer CEOs make different decisions in terms of personnel, expenditure,investment and international trade, attaining higher productivity levels.
Keywords: firm performance; CEO tenure; great recession
JEL Codes: G34; L25; J24
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| newcomer CEOs (M13) | firm performance (L25) |
| high-tenured or internally promoted CEOs (M51) | firm performance (L25) |
| newcomer CEOs (M13) | innovative management decisions (O32) |
| newcomer CEOs (M13) | lower likelihood of firm failure (G32) |
| newcomer CEOs (M13) | higher productivity levels (O49) |
| newcomer CEOs (M13) | different decisions regarding personnel expenditure (M51) |
| newcomer CEOs (M13) | different decisions regarding investment (G11) |
| newcomer CEOs (M13) | different decisions regarding international trade (F10) |