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Journal of Finance Vol. 65 No. 6 2010

Managerial Legacies, Entrenchment, and Strategic Inertia

Catherine Casamatta; Alexander Guembel1,2

1 Institut d'Économie Industrielle · 2 University of Oxford

open access

Abstract

This paper argues that the legacy potential of a firm's strategy is an important determinant of CEO compensation, turnover, and strategy change. A legacy makes CEO replacement expensive, because firm performance can only partially be attributed to a newly employed manager. Boards may therefore optimally allow an incumbent to be entrenched. Moreover, when a firm changes strategy it is optimal to change the CEO, because the incumbent has a vested interest in seeing the new strategy fail. Even though CEOs have no specific skills in our model, legacy issues can explain the empirical association between CEO and strategy change.

DOI
10.1111/j.1540-6261.2010.01619.x
Volume
65
Issue
6
Pages
2403-2436
Language
en
Sources
bibtex:phds-export.bib openalex crossref

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