by R. Christopher Small for The Harvard Law School Forum, June 2nd 2011.
In the paper, Managers Who Lack Style: Evidence from Exogenous CEO Changes, which was recently made publicly available on SSRN, we study managerial style effects in firm decisions by examining exogenous CEO changes in a panel of 8,615 Compustat firms from 1990 to 2007. The hypothesis that managers have varying preferences or traits that affect their corporate decisions has a great deal of intuitive appeal and is implicit in many discussions of leadership. Prior empirical evidence lends support to this general hypothesis and suggests that managerial style effects play a substantive role in firms’ investment and financing choices. This raises the possibility that much of the unexplained variation in these and related choices is driven by the identities of a firm’s leaders rather than more traditional factors such as various economic tradeoffs.
While prior research on this issue has generated many interesting findings, a major weakness arises from the fact that endogenous leadership changes are used to identify style effects. In this paper we overcome this weakness by identifying a large set of exogenous CEO changes arising from deaths, health concerns, and, in some parts of the analysis, natural retirements. Quite surprisingly, we find no significant evidence of abnormal changes in asset growth, investment intensity, leverage, or profitability subsequent to exogenous CEO changes.
If CEOs manage with style, they certainly do not appear to be present in our sample of managers who assume the top position in an exogenous leadership transition. Given the surprising contrast between our findings and prior evidence, we turn to examining the endogenous job changes in our sample. Here we find that CEO changes that are either overtly forced or likely forced are in fact followed by abnormally large changes in corporate policies. While our evidence based on exogenous changes cautions against any type of causal interpretation of this evidence, it is nonetheless informative. In particular, these findings add to large body of evidence suggesting that firms in crisis tend to simultaneously make numerous operational, governance, and managerial (continue reading… )