Toward more accurate contextualization of the CEO effect on firm performance

Abstract

We introduce multiple refinements to the standard method for assessing CEO effects on performance, variance partitioning methodology, more accurately contextualizing CEOs' contributions. Based on a large 20-year sample, our new 'CEO in Context' technique points to a much larger aggregate CEO effect than is obtained from typical approaches. As a validation test, we show that our technique yields estimates of CEO effects more in line with what would be expected from accepted theory about CEO influence on performance. We do this by examining the CEO effects in subsamples of low-, medium-, and high-discretion industries. Finally, we show that our technique generates substantially different - and we argue more logical - estimates of the effects of many individual CEOs than are obtained through customary analyses. Copyright © 2013 John Wiley & Sons, Ltd. Copyright © 2013 John Wiley & Sons, Ltd.