Effect of Ceos

Powerful Essays
THE EFFECT OF CEOS ON FIRM PERFORMANCE

ALISON MACKEY Assistant Professor of Management Orfalea College of Business California Polytechnic State University San Luis Obispo, CA 93407 Tel: (805) 756-1232 Fax: (805) 756-1473 mackey@calpoly.edu

Keywords: Executive Leadership, CEOs, Firm Performance, Leadership, Variance Decomposition, Managers Forthcoming in Strategic Management Journal

THE EFFECT OF CEOS ON FIRM PERFORMANCE

ABSTRACT The extent to which CEOs influence firm performance is fundamental to scholarly understanding of how organizations work; yet, this linkage is poorly understood. Previous empirical efforts to examine the link between CEOs and firm performance using variance decomposition, while provocative, nevertheless suffer from methodological problems that systematically understate the relative impact of CEOs on firm performance compared to industry and firm effects. This paper addresses these methodological problems and re-examines the percentage of the variance in firm performance explained by heterogeneity in CEOs. The results of this paper suggest that in certain settings the “CEO effect” on corporate-parent performance is substantially more important than that of industry and firm effects, but only moderately more important than industry and firm effects on business-segment performance.

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Do CEOs have an impact on firm performance? And if they do, where in a firm do they matter most—at the corporate or segment level? These questions have captured the attention of business scholars and practitioners for over a century (Bass, 1991; Carpenter, Geletkanycz, and Sanders, 2004; Yukl, 2002). On the one hand, some theorists (Barnard, 1938) and many

practitioners (e.g., Drucker 1954; Collins, 2001) have argued that leadership—especially in a firm’s senior positions—has an important impact on firm performance and survival at all levels. Barnard (1938), for example, argued that top leaders formulate a collective purpose that binds



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Oxford University Press: New York. 23 Table 1 Descriptive Statistics Execucomp File 1992-2002 Executive Characteristics Salary Salary + Bonus Total Compensation Firm Characteristics Return on Assets Tobin’s q Net Income Operating Income before Depreciation Sales Percent Change in Sales Employees Assets Sample Restriction #1: Only Firms with CEO Turnover $672,836 $1,322,461 $4,211,427 4.66 1.78 346,400,100 1,060,647,000 6,626,926,000 8.35% 30,504 9,109,517,000 Sample Restriction #2: Only Firms With CEO Turnover and Serial CEOs $713,987 $1,553,545 $6,618,000*** 4.23 1.67 259,658,900 985,708,500 6,869,000,000** 12.54%* 43,263*** 6,987,000,000 $656,280 $1,291,412 $3,816,000 4.63 1.78 281,952,100 901,276,100 5,526,265,000 9.95% 24,941 7,558,000,000 13550 8522 801 Segment Year Observations 562 459 98 Industries 988 520 51 Corporate-parents 3025 1802 181 Business-segments 1641 1176 92 CEOs Significance test denotes differences between the most restrictive sample and the entire execucomp file. * p

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