Does the Fit of Managerial Ability with Firm Strategy Matters on Firm Performance

Abstract

The study aims to answer why the previous studies find the positive or insignificant effect of the CEO's abilities on firm performance. Using 34,285 CEO-firm-year panel data from the U.S. publicly traded firms drawn from the BoardEx and EXECUXOMP database during from 1992 to 2014, the results show that the fit of the CEO's generality or specialist ability with firm strategy matters on firm performance and risk. This study computes a discrete STRATEGY composite measure to construct firm strategy types, such as Prospect or Defend and use CEOs' résumés to construct an index of general skills that are transferable across firms and industries. The results find that generalist CEOs are more suitable for prospectors than specialist CEOs. Firm performance is much better when specialist CEOs work for Defenders. Although the firm performance is better too for the generalist CEOs who fit for the Prospect strategy, the firm's risk is up too. The result suggests that firms need to consider their chosen business strategy to recruit and select CEOs Our findings provide direct evidence that the match between CEO's ability and the firm's strategy is crucial to firm performance and risk.

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