CEO age, shareholder monitoring, and the organic growth of European firms

Abstract

AbstractThe question of why some firms grow faster than others is of high theoretical and practical importance. Beyond a wealth of studies based on stochastic models, firm growth has mostly been explained by looking at the structural characteristics of firms, sectors, and countries. The role of managers’ characteristics in fostering firms’ growth has been explored much less. In this study, we adopt one key characteristic of managers, the age of the chief executive officer (CEO) and examine its relationship with the firm’s organic growth. Using data from a large sample of European manufacturing firms, we find that firms managed by young CEOs grow faster in terms of sales and assets, but not in terms of profitability. These results hold with the inclusion of a large vector of firm and CEO characteristics, and a battery of robustness checks, including issues related to the time horizon and appointment of CEOs, the educational attainment of younger cohorts of managers, and endogeneity. We hypothesize that young CEOs are incentivized to boost firm growth to signal their talent in the managerial market and to secure a longer stream of future compensation benefits. To the extent that firm growth does not translate into higher profitability, this may create an agency problem, due to the divergence of this corporate strategy from shareholders’ targets. In line with this hypothesis, we find that a more concentrated ownership that allows for more effective monitoring moderates the relationship between CEO age and firm growth.