CEO Effects on Firm Value and Its Components

In this paper, we contribute to the ongoing debate about the extent to which CEOs influence firm performance. We also seek to shift the existing debate from its narrower focus on CEO effects on firm performance (typically measured as ROA) to a broader focus on CEO effects on firm value (operationalized in terms of Tobin’s Q) and on the components of firm value. We analyze the three components of firm value: current performance (ROA), leverage (equity multiplier), and market valuation (price-to-earnings ratio). We also introduce a methodological innovation, the fixed effect least squares dummy variable (FELSDV) approach, to better understand the specific influence of CEOs on firms. The advantage of the FELSDV approach is that the CEO and firm effects are identified. Empirically, we find CEOs’ impact on firm value and its components are large. We examine the correlation among the CEOs’ unobservable time-invariant traits that impact firm value and its components. Our results have important implications for boards of directors in selecting and evaluating CEOs.