CEO Ability, Pay and Firm Performance

Abstract

Do CEOs really matter? Do cross-sectional differences in firm performance and CEO pay reflect differences in CEO ability? Examining CEO departures over 1992-2002, we first find that the stock price reaction upon departure is negatively related to the firm’s prior performance and to the CEO’s prior pay. Second, the CEO’s subsequent labor market success is greater if the firm’s pre-departure performance is better, the prior pay is higher, and the stock market’s reaction is more negative. Finally, better prior performance, higher prior pay, and a more negative stock market reaction are associated with worse post-departure firm performance. Collectively, these results reject the view that differences in firm performance stem entirely from non-CEO factors such as the firms’ assets, other employees or “luck,” and that CEO pay is unrelated to the CEO’s contribution to firm value.

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