Raids, Rewards, and Reputations in the Market for CEO Talent

Abstract

We examine the basic hypothesis that the market for managerial talent rewards managers from firms with superior stock price performance. We identify a set of outside CEO hires in a set of large publicly traded firms and investigate the stock price performance of the prior employers of these executives. Using 5-year buy-and-hold returns as our basic performance measure, we find that the prior employers of our sample executives did, on average, exhibit superior performance compared to a variety of benchmarks. A conditional logit analysis confirms that superior firm performance increases the likelihood that an executive will get an outside CEO job. Our results are most pronounced for executives who jump immediately from their prior employer to the new employer (raids) and for executives who were more highly ranked at their prior employer.

We also examine compensation contracts and find that executives are typically awarded large initial hiring grants composed of stock options, restricted stock, and cash signing bonuses. These grants are highly correlated with the value of the unvested option and restricted stock position the executive leaves behind at his old employer. The evidence also suggests that these grants are positively related to prior firm performance, even after controlling for the forfeited position at the prior employer.

We interpret our findings as providing substantial support for the basic hypothesis that superior stock price performance enhances an executive's external labor market opportunities. In our view this is an interesting and important finding, as it supports the basic assumption underlying a large class of models concerning executive decision making and contracting in the presence of career concerns.

Keywords: Career concerns, Outside CEOs, Performance measurement, Managerial labor market, Executive compensation

JEL Classification: G32, G34, J33, J41