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Managerial Legacies, Entrenchment, and Strategic Inertia
Author(s) -
CASAMATTA CATHERINE,
GUEMBEL ALEXANDER
Publication year - 2010
Publication title -
the journal of finance
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 18.151
H-Index - 299
eISSN - 1540-6261
pISSN - 0022-1082
DOI - 10.1111/j.1540-6261.2010.01619.x
Subject(s) - compensation (psychology) , business , inertia , industrial organization , executive compensation , legacy system , economics , corporate governance , computer science , finance , psychology , physics , classical mechanics , psychoanalysis , software , programming language
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.