Do CEOs Matter?

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Abstract
Estimating the value of top managerial talent is a central topic of research that has attracted widespread attention from academics and practitioners. Yet, studying the impact of managers on firm performance is difficult because of endogeneity and omitted variables concerns. We test for the impact of managers on firm performance in two ways. First, we examine whether top management (chief executive officers and board members) deaths have an impact on firm performance, focusing on the manager and firm characteristics that are associated to large manager-death effects. To our knowledge, this is the first test that assesses the consequences of managerial deaths on firm operating performance, investment rates and sales growth. Second, to bolster the interpretation that these effects are driven by managers, we test whether the death of top management' immediate family members (spouse, parents, children, etc) affect firm prospects. These events provide us with exogenous variation in the attention managers pay to their business and thus allow us to measure the impact of managerial contribution to firm prospects. Our main findings are four. First, CEO deaths are strongly correlated with declines in firm operating profitability, asset growth and sales growth. Second, the death of board members does not seem to affect firm prospects, indicating that not all senior managers are equally important for firms' outcomes. Third, CEOs' immediate family deaths are significantly negatively correlated to firm performance. This result establishes a strong link between the personal and business roles that top management play. Fourth, the drop in performance (and hence the CEO contribution to value) is higher in firms with more hierarchical organizations, in rapidly growing industries, and in industries with a highly educated labor force. Overall, our findings demonstrate CEOs are extremely important for firms' prospects.

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