← Search

Strategic Management Journal Vol. 35 No. 12 2014

The use of variance decomposition in the investigation of CEO effects: How large must the CEO effect be to rule out chance?

Markus Fitza1,2

1 Department of Management, Mays Business School Texas A&M University College Station Texas U.S.A. · 2 Faculty of Business and Law The University of Newcastle Callaghan New South Wales Australia

Abstract

Variance decomposition analysis is often used to examine the degree to which CEO s influence their companies' performance (the so‐called CEO effect). Such studies play an important role in a body of literature that investigates the effect of leadership on organizations. In this paper, I argue that these previous studies have an important underlying flaw. Empirically, these studies wrongly attribute the performance effect of randomness—of chance—to the CEO . I demonstrate how randomness can affect the measured effects in a variance decomposition analysis, and I show that this is especially problematic for the measurement of CEO effects. I demonstrate how this results in a greatly inflated CEO effect and develop an approach to correct for it .

DOI
10.1002/smj.2192
Volume
35
Issue
12
Pages
1839-1852
Language
en
Sources
openalex bibtex:phds-export.bib crossref

Cite