Updated: Jul 12, 2019
The impact of CEOs on firm performance is at the core of many economic debates, and the identity of the CEO matters for firm performance. But what do CEOs actually do? Do different CEOs behave differently? And do differences in behavior matter for firm performance?
The economists, Bandiera, Hansen, Prat and Sadun develop a new methodology to measure CEO behavior using large data samples. They
combine (i) a survey that records each activity the CEOs undertake in a random work-week and (ii) a machine learning algorithm that projects the several dimensions of CEO behavior onto a low-dimensional behavior index.
By using this data the authors study the correlation between CEO behavior and firm performance within the framework of a simple firm-CEO matching model.
The results show that on average CEOs with high values of the behavior index are more likely to be found in larger firms, in which the demand for structured and coordinative activities is presumably more intense. They show that CEOs differ in their behavior along a numb
er of dimensions and that these differences tend to co-vary with observable firm characteristics, such as firm size, organizational structure and industry characteristics. In addition, they find that the correlation between CEOs behavior and firm performance materializes four years after the CEO appointment.
Reference: Bandiera, O., Hansen, S., Prat, A., & Sadun, R. (2019). Ceo behavior and firm performance. Forthcoming in the Journal of Political Economy.