‘Til death do us part: The relative merits of founder CEOs

Abstract

This paper addresses a question faced by every firm in the economy, namely is it optimal for a firm’s founder to lead the company as CEO? To identify the treatment effect of founder CEOs on corporate policy and firm value, I exploit a natural experiment involving exogenous founder-to-professional CEO turnovers that arise from a founder’s death or illness. I find that, relative to comparable firms that retain their founder CEO, firms that must switch to a professional CEO experience a 10% reduction in their internally generated innovation. However, professional CEOs counteract this reduced internal R&D productivity by undertaking other firm value enhancing activities, namely acquiring external technologies through greater M&A activity, increasing firm leverage and nurturing larger, more stable top management teams. These combined policy changes have offsetting effects on total firm value, implying that founder and professional CEOs have distinct yet valuable skill sets.