All Good Things Come to an End: CEO Tenure and Firm Value

We provide evidence that CEO tenure exhibits an inverted U-shaped relation with firm value and M&A announcement returns, consistent with benefits (e.g., experience, learning, relations) and costs (e.g., CEO-firm mismatch, entrenchment, reluctance to change) arising over a CEO’s time in office. Depending on the dynamics of a firm’s economic environment which affect the cost-benefit relation of tenure, we find economically meaningful variation in the point in time at which costs start to outweigh benefits. The documented CEO life cycle is robust to a large set of robustness tests, including various alternative explanations, CEO-firm fixed effects, and nonparametric estimations, and is supported by an analysis of CEO sudden deaths. Economic recessions and regulatory changes in corporate governance as exogenous shocks to the cost-benefit relation of tenure further support our findings.