To Each According to His Ability? A Cross-Sectional Analysis of the Market for CEO Talent

This paper o¤ers direct evidence of the role of managerial talent in the market for CEOs. We construct two empirical measures of CEO talent based on perceptions of a CEO’s reputation and prior career outcomes. Using a newly hand-collected sample of 2,195 CEO successions between 1993 and 2005, we document that: 1) …rst-year total pay is an increasing and convex function of CEO talent, and increasingly so for outside successions; 2) appointments of talented CEOs are associated with signi…cantly higher stock market returns and operating performance, and the positive relation between …rm performance and CEO talent is signi…cantly stronger for outside successions; 3) turnover rates are higher among talented CEOs, especially after adverse …rmspeci…c shocks and for outside successions. Our analysis addresses the problems of measurement error and imperfect proxies by aggregating multiple talent proxies into a simple one-dimensional CEO talent factor that explains a wide variety of CEO labor market outcomes. Our evidence is strongly consistent with competitive models of the CEO labor market. As such, our …ndings suggest that fostering the role of the external labor market in CEO successions can create value for shareholders.