Managerial Legacies, Entrenchment, and Strategic Inertia

Catherine Casamatta and Alexander Guembel ()

Journal of Finance, 2010, vol. 65, issue 6, 2403-2436

Abstract: This paper argues that the legacy potential of a firm's strategy is an important determinant of CEO compensation, turnover, and strategy change. A legacy makes CEO replacement expensive, because firm performance can only partially be attributed to a newly employed manager. Boards may therefore optimally allow an incumbent to be entrenched. Moreover, when a firm changes strategy it is optimal to change the CEO, because the incumbent has a vested interest in seeing the new strategy fail. Even though CEOs have no specific skills in our model, legacy issues can explain the empirical association between CEO and strategy change.

Date: 2010
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https://doi.org/10.1111/j.1540-6261.2010.01619.x

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Working Paper: Managerial Legacies, Entrenchment and Strategic Inertia (2007)
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Persistent link: https://EconPapers.repec.org/RePEc:bla:jfinan:v:65:y:2010:i:6:p:2403-2436

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