To mitigate endogeneity concerns arising from endogenous CEO-firm matching and past performance, we additionally examine the stock market reaction to announcements of sudden, unexpected CEO deaths taking place in the period 1950-2017. We obtain similar results based on a semi-parametric estimation that does not assume a functional form. We use several empirical tests to confirm that the hump shape is statistically significant and that it best fits the data. Specifically, for the average S&P 1500 firm, we find that the relation between CEO tenure and firm value is increasing over more than the first decade of a CEO’s tenure and starts to decline after about 14 years. 732).Įxamining S&P 1500 firms between 19, our study is the first to provide systematic evidence of a hump-shaped CEO tenure-firm value relation. Overall, they predict that “ performance very early and very late in the tenure will be lower” (p. However, Hambrick and Fukutomi (1991) also argue that, the longer they stay in office, CEOs become more powerful, less able to learn, and less engaged, which all lead to declining firm performance. Hambrick and Fukutomi (1991) argue that CEOs will contribute to firm performance positively over time as they increase their task knowledge and become more capable of making value-enhancing decisions. The most explicit theory of CEO tenure and firm performance is Hambrick and Fukutomi’s (1991) descriptive model of a CEO’s “seasons”. We base our empirical predictions on key assumptions and findings from the theoretical literature in management and economics. Second, by providing evidence on the determinants of the CEO tenure-firm value association. Specifically, we measure firm value using Total q from Peters and Taylor (2017), who propose an adjustment to Tobin’s q that incorporates intangible assets into the denominator by capitalizing R&D and a portion of SG&A expenses. First, by looking at firm value, a comprehensive and forward-looking measure that captures the realized and expected net benefits of CEOs’ actions to shareholders. To inform the question of whether there exists an optimal CEO tenure, we bridge this gap in the literature in two ways. Yet, this body of evidence does not provide a clear answer to a fundamental question: How does firm value vary over a CEO’s tenure?
Empirically, a mosaic of evidence suggests that corporate outcomes – such as earnings management (Ali and Zhang, 2015), firm-customer and firm-employee relationships (Luo et al., 2014), innovation (Wu et al., 2005), net investments (Pan et al., 2016), and profitability (Henderson et al., 2006) – vary over the CEO’s time in office. Among academics and practitioners, there is an ongoing debate over whether CEOs stay in office too long.
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