The Determinants and Impact of Executive - Firm Matches ∗ JOB MARKET PAPER

This paper studies complementarities between executive and firm characteristics to identify the sources of match-specific productivity. The complementarities provide a way to formalize the notion of “a good fit” between an executive and a firm. First, there is the well-known complementarity between firm size and managerial talent. Second, the degree of diversification of the firm is complementary to the cross-industry experience of the manager. Third, the R&D intensity of the firm is complementary to the technical expertise and innovation propensity of the manager. These complementarities jointly explain the two components of executive labor market outcomes – job assignments and executive compensation. Productivity parameters reflecting the strength of the complementarities are structurally estimated using a competitive assignment model. Results reveal that the latter two empirically under-explored complementarities are important yet neglected sources of match-specific productivity. Further, estimated matching quality is associated with better post-matching performance: announcement day and cumulative abnormal returns, Tobin’s Q, and executive tenure duration are all higher for better executive-firm matches. Taken together, the matching of managers to firms contributes to the substantial difference in corporate outcomes and executive compensation. ∗I am deeply indebted to my advisor, Rajesh K. Aggarwal, for his invaluable guidance and support. I am also especially grateful to my committee members, Patrick Bajari, Rajdeep Singh, and Andrew Winton, for very insightful comments and suggestions. This paper benefits from discussions with Gordon Alexander, Nina Baranchuk, Jeffrey Coles, Frederico Belo, Jeremy Fox, Murray Frank, Huijing Fu, Jeremy Graveline, Shen Huang, Xu Jiang, Felix Meschke, Shawn Mobbs, Minjung Park, Yiming Qian, Tracy Wang, Jianfeng Yu, and Xiaoyun Yu. All errors are my own. †Department of Finance, University of Minnesota, 321 19th Avenue South, 3-122, Minneapolis, MN 55455. e-mail: [email protected]