Article2008

The Difference That CEOs Make: An Assignment Model Approach

525 citations0/0 files storedAmerican Economic Review

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Corporate Finance and Governance Labor market dynamics and wage inequality Human Resource and Talent Management

Abstract

This paper presents an assignment model of CEOs and firms. The distributions of CEO pay levels and firms' market values are analyzed as the competitive equilibrium of a matching market where talents, as well as CEO positions, are scarce. It is shown how the observed joint distribution of CEO pay and market value can then be used to infer the economic value of underlying ability differences. The variation in CEO pay is found to be mostly due to variation in firm characteristics, whereas implied differences in managerial ability are small and make relatively little difference to shareholder value. (JEL G32, M12, M52)

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References

1986Agency Costs of Free Cash Flow, Corporate Finance, and Takeovers 1978On the Size Distribution of Business Firms 2008Executive compensation 1965Mergers and the Market for Corporate Control 1957Assignment Problems and the Location of Economic Activities 2008Why Has CEO Pay Increased So Much? *2001Are CEOs Rewarded for Luck? The Ones Without Principals Are 1927Weltwirtschaftliches Archiv

Cited by

2009Power Laws in Economics and Finance 2008Power Laws in Economics and Finance 2016Power Laws in Economics: An Introduction 2016The Dynamics of Inequality 2016What's in an education? Implications of CEO education for bank performance n.d.CEO Turnover in a Competitive Assignment Framework 2016A Supply and Demand Framework for Two-Sided Matching Markets 2019

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