Does CEO managerial ability matter? Evidence from corporate investment efficiency
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This study investigates how higher ability CEOs behave differently from lower ability CEOs in making investment decisions and, particularly, whether CEO managerial ability contributes to improved investment efficiency. I show evidence that more able CEOs make more efficient investment decisions. Specifically, talented CEOs increase (decrease) capital expenditures, acquisition expenditures, and total investments when their firms operate in settings more prone to under-investment (over-investment). These results suggest that high managerial ability helps with overcoming the two sources of investment inefficiency: over- and under-investment. I also find that the positive impact of CEO managerial ability on investment efficiency generally persists across different levels of board monitoring, whereas it gets weaker as the CEOs are overly exposed to equity risk. Robustness tests of using alternative measures of CEO managerial ability and controlling for potential endogeneity issues generate consistent results. Overall, the findings suggest that higher managerial ability leads to more efficient investment decision-making.
KeywordsManagerial ability Corporate investment Investment efficiency Managerial incentives Board monitoring
JEL ClassificationG31 G34 M41
I am grateful to the members of my dissertation committee, Professors Myung S. Park (Chair), Benson Wier, David Harless, and Jean Zhang for their insights, advice, and support.
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