Why a Good CEO is Hard to Find: The Channels Through which CEOs Affect Firm Value

Although a growing body of research suggests that CEOs can exert considerable influence on firm performance, less attention has been given to how CEOs influence firm value. In this paper, we analyze three channels through which CEOs may affect firm value: efficient use of a firm’s assets, strategic investments that affect market valuation of a firm’s stock, and the degree of leverage in capital structure financing decisions. Our analysis suggests robust CEO effects on firm value through all three channels. Our findings contribute to the resource-based view of CEOs as a rare and valuable resource by suggesting that high-performing CEOs can influence firm value through multiple channels that require a variety of skill sets. An earlier version of this paper was presented at the Strategic Management Society conference in Atlanta. We thank session participants for helpful comments. We would like to thank Alison Mackey and Bob Wiseman for helpful comments on an earlier version of this paper. Bolinger: Department of Management, Idaho State University, 921 S. 8 Ave., Pocatello, ID, 83209. Phone 208-2826242, email: boliale2@isu.edu Brookman: Department of Finance, Idaho State University, 921 S. 8th Ave, Pocatello, ID 83209. phone 208-2823041, email: broojeff@isu.edu * Corresponding author: Thistle: Department of Finance, University of Nevada, Las Vegas, 4505 Maryland Parkway, Box 456008, Las Vegas, Nevada, 89154-6008, phone: 702-895-3856, fax: 702-895-4650, email: paul.thistle@unlv.edu Why a Good CEO is Hard to Find: The Channels Through which CEOs Affect Firm Value INTRODUCTION There is a growing body of literature demonstrating that CEOs exert considerable influence on measures of firm value and that their influence has increased in recent years (e.g., Carpenter, Geletkanycz & Sanders, 2004; Hambrick & Quigley, 2013; Mackey, 2008; Quigley & Hambrick, 2014). While the evidence suggests that CEOs affect firm value, how they influence firm value is less clear. From the resource-based view (RBV), executive managers can be thought of as valuable, rare, inimitable, and non-substitutable (VRIN) resources and thus a source of a firm’s sustainable competitive advantage (Barney, 2001; Wernerfelt, 1995). Although resource-based explanations of a manager’s contributions to firm value remain influential (Barney, Ketchen & Wright, 2011), the issue of how CEOs, as an internal resource of a firm, generate superior rents for their firms remains an open question (Ketchen, Hult & Slater, 2007). In this paper, we address the question of how CEOs influence firm value by analyzing the channels through which CEOs contribute to firm value, an issue that has received little attention in the strategic management literature. We address a “black box” question that frequently accompanies the resource-based view (Priem & Butler, 2001): How do CEOs influence firm value? Drawing on methods used in research in financial economics (e.g., Chi & Wu, 2012; Fang, Noe & Tice, 2009), we analyze three components of firm value (i.e. a strategic investment channel, a leverage or capital structure channel, and a current performance channel) to examine how CEOs affect different contributors to the value of the firm. Our analysis has implications for firm governance by enabling boards of directors to make more informed CEO compensation and hiring decisions based on the effects of a CEO on the critical drivers of firm value. This study begins to unpack the assertion that top managers can facilitate the generation of firm rents in ways that are difficult for competitors to emulate through skillful deployment and organization