CEO Ability and Firm Performance : Stock Market and Job Market Reactions

Employing a sample of voluntary CEO turnovers selected from S&P 500 firms over the period 2004-2012, we investigate the impact of the prior firm's performance on the length of time expired between when a CEO resigns and when he/she is hired for an equivalent job with a similar company. We find that the better the performance of the previous firm, the shorter the time it takes for the CEO to be hired by another firm. The market is capable of distinguishing between a superior- and a good-quality CEO and reacts more positively to the announcement of hiring a CEO from the former group. Consistent with the market expectation, the post-hire performance of the firm that hires a superior functioning CEO is significantly better than the firm that hires a good-quality CEO