Short Term Fluctuations in the CEO Effect: Evidence from the 2008 Financial Crisis

Abstract

(How) Do external shocks affect the CEO effect? Studies that have debated the CEO effect have initially focused on how much influence CEOs in general—as opposed to industry and firm—have on firm performance. More recently, studies have shifted focus from ‘how much’ to ‘when’, scrutinizing environmental determinants under which the CEO effect is more or less pronounced. Typically relying on large panel datasets, previous studies have reported an average CEO effect over the entire sample period. In doing so, these studies have forgone the possibility to investigate fluctuations in the CEO effect over time. In this study, we focus on short-term fluctuations of the CEO effect caused by an external shock in the firm’s economic activity. In particular, we use the 2008 global financial crisis to investigate how the CEO effect changed from the pre-crisis period, over the crisis period, to the post-crisis period. Using mixed effect modeling with crossed and nested factors, we find that the CEO effect significantly drops from the pre-crisis to the crisis period, but increases again to pre-crisis levels in the post-crisis period. The results hold under several robustness checks.