American Accounting Association

AUGUST 6-10, 2011  •  DENVER, COLORADO

Session Title: Corporate Governance
Presentation Date: Monday August 8, 2011
Presentation Time: 10:15 am-11:45 am

Do Firms Contract Efficiently on Past Performance When Hiring External CEO’s?

Richard A. Cazier, Texas Christian University
John M. McInnis, University of Texas at Austin

ABSTRACT: We test whether the pay premium boards place on external CEO candidates' prior firm performance is associated with future performance in the hiring firm. Divergent views exist in the literature as to whether contracting with external CEO candidates on the basis of predecessor firm performance is optimal. We find that the pay premium for predecessor firm performance, though economically significant, does not predict higher performance in hiring firms. In fact, we document a negative relation between this pay premium and future accounting performance. We also find that firms that pay a premium for executives from successful predecessor firms tend to have less attentive boards. Further, we show that this pay premium dissipates quickly after the hiring year. Overall, our results are most consistent with the view that boards over-weight executives' prior firm performance when contracting with external CEO candidates.

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