CEO-Firm Matches: Evidence from Competition Shocks

Abstract

Competition shocks fundamentally alter the nature of a firm's strategy; an increase (decrease) in competition shifts firms’ focus from long-term growth (short-term performance) to short-term performance (long-term growth). Using major decreases and increases of import tariffs as quasi-natural experiments, this paper documents a non-monotonic relationship between competition and the probability of CEO turnover. Based on CEOs’ prior experience, I construct two indices of skills: 1) skills that are suitable for high-competition and short-term performance, and 2) skills that are desirable for low-competition and long-term growth. I find that firms are more likely to retain a CEO or appoint a candidate with high-competition (low-competition) skills following a tariff cut (increase). Using family firms as instruments for the quality of CEO-firm matches, I find that firms run by CEOs with relevant skills outperform those run by CEOs who lack those skills. Because turnovers are costly, firms change their CEOs if the benefits of a CEO with relevant skills outweigh the costs. I examine whether firms that retain their CEOs alternatively change their compensation plan to motivate CEOs to deliver appropriate strategies. I find that financial conditions and CEO power prevent firms from implementing compensation schemes that promote optimal strategies following competition shocks