Managerial Entrenchment and the Market for Talent

Abstract

Abstract This paper studies how the nature of managerial skills affects firms’ governance decisions. As required skills shift from firm specific toward more general abilities, replacing an underperforming CEO with an outside hire becomes more profitable for shareholders. Therefore, firms adopt stronger governance arrangements to limit the entrenchment of incumbent CEOs and exploit the improved opportunities offered by the market for talent. The analysis rationalizes the observed trend toward stronger corporate governance and offers novel empirical predictions concerning the relationship between managerial entrenchment, firm size, and the nature of managerial skills. (JEL D83, D86, G34) Received November 15, 2021; editorial decision July 11, 2022 by Editor Robert Marquez. Authors have furnished an Internet Appendix, which is available on the Oxford University Press Web site next to the link to the final published paper online.