Hiring the Right CEO: How Does the Type of CEO Industry Experience Affect Firm Performance, Firm Risk-Taking Behavior, and CEO Compensation?
DOI:
https://doi.org/10.33736/ijbs.3762.2021Keywords:
CEO Industry Experience, Firm Performance, Firm Risk-Taking Behavior, CEO CompensationAbstract
This paper examines how the type of CEOs’ industry experience (whether a CEO has cross-industry or specific-industry experience) on firm performance, firm risk-taking behavior, and their own compensation. We find that CEOs with cross-industry experience tend to relatively lower the firm performance as well as invest less on R&D. On the other hand, CEOs with specific-industry experience lead firm to higher performance and invest more on R&D expenditures until it reaches a certain threshold, especially among high-growth firms. Total compensation paid to the CEO does not seem to be affected by the type of CEO industry experience. This paper contributes to the literature that examines the impact of CEO characteristics on firm outcomes and CEO compensation. One important business application of our paper is that to optimize firm performance, firms should hire CEOs with the length of specific-industry experience not beyond the threshold levels.
References
Bailey, E. E., & Helfat, C. E. (2003). External management succession, human capital, and firm performance: An integrative analysis. Managerial and Decision Economics, 24(4), 347-369. https://doi.org/10.1002/mde.1119
Barkema, H. G., & Gomez-Mejia, L. R. (1998). Managerial compensation and firm performance: A general research framework. Academy of Management journal, 41(2), 135-145. https://doi.org/10.2307/257098
Barker, V. L. III., & Mueller, G. C. (2002). CEO characteristics and firm R&D spending. Management Science, 48(6), 782-801. https://doi.org/10.1287/mnsc.48.6.782.187
Benmelech, E., & Frydman, C. (2015). Military CEOs. Journal of Financial Economics, 117(1), 43-59. https://doi.org/10.1016/j.jfineco.2014.04.009
Bernile, G., Bhagwat, V., & Rau, P. R. (2017). What doesn't kill you will only make you more risk‐loving: Early‐life disasters and CEO behavior. The Journal of Finance, 72(1), 167-206. https://doi.org/10.1111/jofi.12432
Brockman, P., Krishnan, G., Lee, H. S., & Salas, J. M. (2019). Implications of CEO succession origin and in-house experience for audit pricing. Journal of Accounting, Auditing & Finance, 1-32. https://doi.org/10.1177/0148558X19832104
Bragaw, N. A., & Misangyi, V. F. (2017). The value of CEO mobility: contextual factors that shape the impact of prior CEO experience on market performance and CEO compensation. Human Resource Management, 56(2), 243-265. https://doi.org/10.1002/hrm.21737
Cain, M. D., & McKeon, S. B. (2016). CEO personal risk-taking and corporate policies. Journal of Financial and Quantitative Analysis, 51(1), 139-164. https://doi.org/10.1017/S0022109016000041
Calvet, L. E., & Sodini, P. (2014). Twin Picks: Disentangling the Determinants of Risk‐Taking in Household Portfolios. The Journal of Finance, 69(2), 867-906. https://doi.org/10.1111/jofi.12125
Chahyadi, C., & Wineka, P. (2019). How does CEO career origin influence firm risk-taking? Journal of Accounting and Finance, 19(4), 77-96. https://doi.org/10.33423/jaf.v19i4.2174
Chen, W., & Miller, K. D. (2007). Situational and institutional determinants of firms' R&D search intensity. Strategic Management Journal, 28, 369-381. https://doi.org/10.1002/smj.594
Custódio, C., Ferreira, M. A., & Matos, P. (2013). Generalists versus specialists: Lifetime work experience and chief executive officer pay. Journal of Financial Economics, 108(2), 471-492. https://doi.org/10.1016/j.jfineco.2013.01.001
Dokko, G., Wilk, S. L., & Rothbard, N. P. (2009). Unpacking prior experience: How career history affects job performance. Organization Science, 20(1), 51-68. https://doi.org/10.1287/orsc.1080.0357
Drobetz, W., Von Meyerinck, F., Oesch, D., & Schmid, M. (2018). Industry expert directors. Journal of Banking & Finance, 92, 195-215. https://doi.org/10.1016/j.jbankfin.2018.04.019
Faccio, M., Marchica, M. T., & Mura, R. (2016). CEO gender, corporate risk-taking, and the efficiency of capital allocation. Journal of Corporate Finance, 39, 193-209. https://doi.org/10.1016/j.jcorpfin.2016.02.008
Faleye, O., Hoitash, R., & Hoitash, U. (2018). Industry expertise on corporate boards. Review of Quantitative Finance and Accounting, 50(2), 441-479. https://doi.org/10.1007/s11156-017-0635-z
Fama, E. F., & French, K. R. (1993). Common risk factors in the returns on stocks and bonds. Journal of Financial Economics, 33, 3-56. https://doi.org/10.1016/0304-405X(93)90023-5
Fee, C. E., & Hadlock, C. J. (2003). Raids, rewards, and reputations in the market for managerial talent. The Review of Financial Studies, 16(4), 1315-1357. https://doi.org/10.1093/rfs/hhg031
Frydman, C., & Jenter, D. (2010). CEO compensation. Annual Review of Financial Economics, 2(1), 75-102. https://doi.org/10.1146/annurev-financial-120209-133958
Graham, J. R., Harvey, C. R., & Puri, M. (2013). Managerial attitudes and corporate actions. Journal of Financial Economics, 109(1), 103-121. https://doi.org/10.1016/j.jfineco.2013.01.010
Hambrick, D. C., & Mason, P. A. (1984). Upper echelons: The organization as a reflection of its top managers. Academy of Management Review, 9(2), 193-206. https://doi.org/10.2307/258434
Hamori, M., & Koyuncu, B. (2015). Experience matters? The impact of prior CEO experience on firm performance. Human Resource Management, 54(1), 23-44. https://doi.org/10.1002/hrm.21617
Hoskisson, R. E., Chirico, F., Zyung, J., & Gambeta, E. (2017). Managerial risk-taking: A multitheoretical review and future research agenda. Journal of Management, 43(1), 137-169. https://doi.org/10.1177/0149206316671583
Karaevli, A. (2007). Performance consequences of new CEO 'Outsiderness': Moderating effects of pre‐and post‐succession contexts. Strategic Management Journal, 28(7), 681-706. https://doi.org/10.1002/smj.589
Malmendier, U., & Tate, G. (2005). CEO overconfidence and corporate investment. The Journal of Finance, 60(6), 2661-2700. https://doi.org/10.1111/j.1540-6261.2005.00813.x
Malmendier, U., Tate, G., & Yan, J. (2011). Overconfidence and early‐life experiences: the effect of managerial traits on corporate financial policies. The Journal of Finance, 66(5), 1687-1733. https://doi.org/10.1111/j.1540-6261.2011.01685.x
Mansfield, E. (1968). Industrial Research and Technological Innovation. Norton, New York.
Mueller, P., Georgakakis, D., & Ruigrok, W. (2017). Jack of all trades or master of none? CEO experience variety and firm performance. Academy of Management Proceedings, 2017(1), 17662. https://doi.org/10.5465/AMBPP.2017.17662abstract
Murphy, K. J., & Zabojnik, J. (2004). CEO pay and appointments: A market-based explanation for recent trends. American Economic Review, 94(2), 192-196. https://doi.org/10.1257/0002828041302262
Ryan Jr, H. E., & Wiggins III, R. A. (2002). The interactions between R&D investment decisions and compensation policy. Financial Management, 5-29. https://doi.org/10.2307/3666319
Wang, G., Holmes Jr, R. M., Oh, I. S., & Zhu, W. (2016). Do CEOs matter to firm strategic actions and firm performance? A meta‐analytic investigation based on upper echelons theory. Personnel Psychology, 69(4), 775-862. https://doi.org/10.1111/peps.12140
Yung, K., & Chen, C. (2018). Managerial ability and firm risk-taking behavior. Review of Quantitative Finance and Accounting, 51(4), 1005-1032. https://doi.org/10.1007/s11156-017-0695-0
Zhang, W. (2015). R&D investment and distress risk. Journal of Empirical Finance, 32, 94-114. https://doi.org/10.1016/j.jempfin.2015.03.009
Downloads
Published
How to Cite
Issue
Section
License
Copyright Transfer Statement for Journal
1) In signing this statement, the author(s) grant UNIMAS Publisher an exclusive license to publish their original research papers. The author(s) also grant UNIMAS Publisher permission to reproduce, recreate, translate, extract or summarize, and to distribute and display in any forms, formats, and media. The author(s) can reuse their papers in their future printed work without first requiring permission from UNIMAS Publisher, provided that the author(s) acknowledge and reference publication in the Journal.
2) For open access articles, the author(s) agree that their articles published under UNIMAS Publisher are distributed under the terms of the CC-BY-NC-SA (Creative Commons Attribution-Non Commercial-Share Alike 4.0 International License) which permits unrestricted use, distribution, and reproduction in any medium, for non-commercial purposes, provided the original work of the author(s) is properly cited.
3) For subscription articles, the author(s) agree that UNIMAS Publisher holds copyright, or an exclusive license to publish. Readers or users may view, download, print, and copy the content, for academic purposes, subject to the following conditions of use: (a) any reuse of materials is subject to permission from UNIMAS Publisher; (b) archived materials may only be used for academic research; (c) archived materials may not be used for commercial purposes, which include but not limited to monetary compensation by means of sale, resale, license, transfer of copyright, loan, etc.; and (d) archived materials may not be re-published in any part, either in print or online.
4) The author(s) is/are responsible to ensure his or her or their submitted work is original and does not infringe any existing copyright, trademark, patent, statutory right, or propriety right of others. Corresponding author(s) has (have) obtained permission from all co-authors prior to submission to the journal. Upon submission of the manuscript, the author(s) agree that no similar work has been or will be submitted or published elsewhere in any language. If submitted manuscript includes materials from others, the authors have obtained the permission from the copyright owners.
5) In signing this statement, the author(s) declare(s) that the researches in which they have conducted are in compliance with the current laws of the respective country and UNIMAS Journal Publication Ethics Policy. Any experimentation or research involving human or the use of animal samples must obtain approval from Human or Animal Ethics Committee in their respective institutions. The author(s) agree and understand that UNIMAS Publisher is not responsible for any compensational claims or failure caused by the author(s) in fulfilling the above-mentioned requirements. The author(s) must accept the responsibility for releasing their materials upon request by Chief Editor or UNIMAS Publisher.
6) The author(s) should have participated sufficiently in the work and ensured the appropriateness of the content of the article. The author(s) should also agree that he or she has no commercial attachments (e.g. patent or license arrangement, equity interest, consultancies, etc.) that might pose any conflict of interest with the submitted manuscript. The author(s) also agree to make any relevant materials and data available upon request by the editor or UNIMAS Publisher.
