Selecting CEOs: Matching the person to the job

Abstract

We characterize the market for CEOs as consisting of value-maximizing boards of directors bidding for CEOs with varying personal traits (effort and risk aversion, expected horizon, and human capital) and CEOs gravitating to those firms that value their particular traits more highly than other firms. While boards select CEOs based on their traits, these CEO characteristics are correlated with the CEO’s age at appointment. Hence, age is used as an observable summary statistic to characterize the market equilibrium. This market sorting process results in younger CEOs (less effort and risk averse, with longer horizons) being hired by firms requiring more effort (startups and high growth firms), riskier firms, and firms with large portfolios of growth options. Older CEOs (with more human capital) are selected to manage more complex (larger) firms. Regulated firms, being less complex, choose CEOs with less human capital (younger CEOs). Finally, young or old CEOs are appointed because no viable middle-aged CEO exists.