SELECTION OF STAR CEOS AND ITS IMPLICATIONS ON FIRM PERFORMANCE AND CEO COMPENSATION

Abstract

My dissertation examines a board's decision to hire a star CEO and the implication of such decision on the new CEO compensation and firm performance. I develop a new methodology to identify a star CEO by analyzing the texts contained in 18,240 Wall Street Journal news articles. Unlike previous measures, my new measure accounts for the time series variations of executives' visibility as well as how favorably these executives are portrayed in the business press. In order to study the role of board composition on CEO selection, executive compensation and firm performance, I introduce board industry tenure, a new measure of board composition, to capture the average years of industry-related experience acquired by independent directors.

In my first essay, I investigate a board's decision to hire a star CEO and analyze the consequences of this decision for firm performance. I show that boards with short industry tenure or busy boards are more likely to select a star CEO. Firms that hire star CEOs subsequently perform worse than firms that hire non-star CEOs. However, after I use the propensity score matching method to control for pre-hiring board composition and other determinants of star CEO selection, firms that hire star CEOs perform equally well as firms that hire non-star CEOs.

My second essay compares the compensation design of a star versus a non-star CEO. I find that a star CEO is awarded 1.87 million dollars more in annual total compensation, and 2.19 million dollars more in annual option compensation, after I control for firm size, board characteristics, B/M ratio, leverage, EBIT/Assets, stock return, firm risk, industry and year effects, and other related variables. In addition, star CEOs receive higher compensation in firms where directors have short industry tenure, where directors hold multiple board seats simultaneously, where board size is large, and where board is composed of less independent directors. The above results hold true after I use a control-group approach, based on CEO matching to alleviate CEO selection issue. I also show that the equity portfolio of star CEOs exhibit higher sensitivities to change in stock price than non-star CEOs.