Learning About CEO Ability and Stock Return Volatility

Yihui Pan; Tracy Yue Wang; Michael S. Weisbach

doi:10.1093/rfs/hhv014

Learning About CEO Ability and Stock Return Volatility

Yihui Pan¹; Tracy Yue Wang²; Michael S. Weisbach³

¹ David Eccles School of Business, University of Utah · ² Carlson School of Management, University of Minnesota · ³ Fisher College of Business, Ohio State University, NBER

Review of Financial Studies 2015

Consistent with predictions from a stylized Bayesian learning model stock return volatility declines with CEO tenure in a convex manner, even for CEOs whose appointments occur for exogenous reasons. The decline is faster when there is higher uncertainty about the CEO's ability when there is more transparency about the firm's prospects, and when CEO ability is more important in value creation. We quantify the importance of uncertainty about CEO ability relative to the firm's fundamental cash flow uncertainty in contributing to stock return volatility, highlighting the importance of management in creating value.

DOI: 10.1093/rfs/hhv014
Volume: 28 (6)
Pages: 1623-1666
Language: en
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