Does the Market Value CEO Styles ?

A growing body of research offers evidence that CEOs and other top executives show large and persistent person-specific heterogeneity in their management styles. Bertrand and Schoar (2003) document that such person-specific styles explain a substantial fraction of the variation in firms’ capital structures, investment decisions and organizational structures. The idea that CEOs greatly differ in their styles is also supported by a number of papers that show substantial changes in a firm’s stock price and accounting performance when its top management changes. For example, Perez-Gonzalez (2006) and Bennedsen, Nielsen, Perez-Gonzalez and Wolfenzon (2007) focus on transitions to family CEOs, and Parrino (1997) focuses on internal versus external successors. Similarly, a large literature suggests that CEOs’ specific traits play a role in their management approach. See, for example, Malmendier and Tate (2008) on CEO overconfidence; Kaplan, Klebanov and Sorensen (2012) on general ability and execution skills; Graham, Harvey and Puri (2013) on optimism and risk aversion; and Benmelech and Frydman (2015) on prior military experience. But there is still considerable debate about the importance of managerial style. First, there is the question of where individual management styles come from: do they predominantly depend on the optimal, endogenous choice of managers, who want to invest in the skill set that promises the highest expected returns? Or are they shaped by formative events that are largely outside a manager’s control? The latter would imply that managers might not be at liberty to change styles, even when they might wish to. And if one’s management style depends on exposure to certain experiences or learning opportunities in a manager’s formative years, there might be constraints in the distribution of management styles (or skills) available in the managerial labor market. The second question is whether managers “matter” to the firms they run. In other words, do managerial styles constitute a value added