Labor Investment Efficiency and CEO Tenure

We examine the impact of CEO tenure on corporate labor investment efficiency. While some studies show that CEO entrenchment increases in tenure (e.g., Hermalin and Weibach, 1998), others argue that managerial expertise builds over time in the office (e.g., Graf-Vlachy et al., 2020). Using a large sample of US firms from 1992-2018, we find that longer-tenured CEOs are associated with more efficient labor investment. This finding is robust to alternative measures of labor investment inefficiency, subsample analyses, and various model specifications. Further analysis shows that longer-tenured CEOs mitigate both under- and over-labor investment problems characterized by under-hiring and under-firing, respectively. The positive effect of CEO tenure on labor investment efficiency is stronger in human capital-intensive industries and firms with greater operational uncertainty, but weaker in firms headquartered in states that adopted the Inevitable Disclosure Doctrine. We conclude that managerial expertise advances in tenure, which enables longer-tenured CEOs to invest in labor more accurately per their needs