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CEO Performance in Severe Crises: The Role of Newcomers

Author

Listed:
  • Tavares, José
  • Sazedj, Sharmin
  • Amador, João
Abstract
A firm’s optimal choice of a CEO involves a trade-off between hiring newcomers – who take time to profit from learning by doing – and avoiding CEO turnover or opting for internal successions – risking that the old guard fall prey to an experience trap, repeating the same old business practices. When firms are hit by an aggregate economic shock, exogenous, unexpected, and unprecedented in nature, reach, magnitude and persistence, conducting ‘business as usual’ no longer applies and having in office a newcomer – a CEO hired recently from another firm – may turn out to be particularly valuable to efficiently abandon old management practices. We use a unique matched firm-employee dataset for Portuguese firms in the wake of the last economic crisis, to estimate the value of a newcomer CEO, who is by nature prone to avoid the experience trap. During the crisis, firms run by newcomer CEOs outperform those run by high tenured and/or internally promoted CEOs in terms of both value added (GVA) and sales. We estimate a performance gap of approximately 18%, and confirm that no such gap exists prior to the crisis. Firms managed by newcomers are also less likely to fail during the crisis. Propensity Score matching confirms our difference-in-differences results. Our findings are robust to different measures of firm performance, across different samples and specifications, and to the inclusion of several CEO and firm controls, including fixed effects. Finally, we show that newcomer CEOs make different decisions in terms of personnel, expenditure, investment and international trade, attaining higher productivity levels.

Suggested Citation

  • Tavares, José & Sazedj, Sharmin & Amador, João, 2018. "CEO Performance in Severe Crises: The Role of Newcomers," CEPR Discussion Papers 13294, C.E.P.R. Discussion Papers.
    • Handle: RePEc:cpr:ceprdp:13294
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    References listed on IDEAS

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    Cited by:

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    2. Alexandre, Fernando & Cruz, Sara & Portela, Miguel, 2020. "Financial Distress and the Role of Management in Micro and Small-Sized Firms," IZA Discussion Papers 13738, Institute of Labor Economics (IZA).

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    More about this item

    Keywords

    Firm performance; Ceo tenure; Great recession;
    All these keywords.

    JEL classification:

    • G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance
    • L25 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Firm Performance
    • J24 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Human Capital; Skills; Occupational Choice; Labor Productivity

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