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Managerial Legacies, Entrenchment, and Strategic Inertia
Published: 11/09/2010 | DOI: 10.1111/j.1540-6261.2010.01619.x
CATHERINE CASAMATTA, ALEXANDER GUEMBEL
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.