Title

CEO Characteristics, Corporate Decisions and Firm Value: Evidence from Corporate Refocusing

Publication Type

Working Paper

Publication Date

11-2010

Abstract

This paper investigates how managerial expertise, specifically, industry expertise, affects firm value through divestiture. Using CEOs’ industry experience along their career path as a measure of their industry expertise, I find that CEOs in diversified conglomerates are more likely to divest divisions that they are less experienced to manage. This evidence is consistent with CEOs divesting divisions to refocus on those divisions in which they specialize, that is, to achieve a better match between their expertise and their firm’s retained assets. Firms that divest for a better CEO-firm match experience significant improvements in operating performance, and significant abnormal stock returns, that persist three years following a divestiture. Further, among firms divesting for a better match, those with more experienced CEOs realize greater gains to firm value. In contrast, divestitures that increase corporate focus but do not improve the expertise-asset match deliver little long-run gain. I conduct various tests to address the endogeneity of CEO appointment and find that the results are robust.

Keywords

CEO characteristics, managerial expertise, refocus, diversification, divestiture

Discipline

Business Administration, Management, and Operations | Organizational Behavior and Theory

Research Areas

Organisational Behaviour and Human Resources