Carnegie Mellon University


October 01, 2019

Research: How Much Do CEOs Matter for Firm Strategic Behavior and Its Outcomes?

Noelle Wiker

New research from the Tepper School disentangles the impacts of CEO effects from general corporate effects on a firms’ strategic behavior and resulting financial outcomes through a variance decomposition study.

CEO‐level factors and firm‐level factors explain a substantial portion of the variance in merger and acquisition (M&A) behavior and performance—but CEO‐level factors matter relatively more, according to new research from the Tepper School of Business at Carnegie Mellon University.   

Sunkee Lee, Assistant Professor of Organizational Theory and Strategy, co-authored the study, “Disentangling the Microfoundations of Acquisition Behavior and Performance,” recently published in Strategic Management Journal. In the paper, Lee, along with collaborators Constance Helfat of the Tuck School of Business and Philipp Meyer-Doyle of INSEAD, found that CEO-level factors (e.g., CEO expertise, CEO prior experience, CEO hubris, etc.) have a greater impact on firm M&A behavior and performance than firm-level factors (e.g., firm age, firm location, firm reputation, firm size, etc.).

“CEO‐level factors and firm‐level factors have been argued to be strong drivers of firms’ strategic behavior such as M&As and its performance. However, the relative importance of the two was unknown—some studies even argue that CEO effects are mostly due to chance,” Lee says.

The authors approached the study by focusing on M&A transactions since acquisitions play a significant role in supporting a firm’s strategic growth objectives and are often led by or closely linked to the CEO. Firms often envelop other companies in order to scale in size, enter new geographic or product markets, or increase the scope of their resources in a changing economic environment. “M&As are one of the most widely used strategy of firms to grow and acquire new capabilities,” says Lee. 

Using a comprehensive dataset on over 29,000 M&As completed by 11,556 CEOs in 6,315 firms across a 20-year period, Lee and his colleagues used a statistical analysis called “variance decomposition” to isolate and explore the relative impact that firm versus CEO-factors have on the number, size, type, and quality of acquisitions undertaken by firms each year. They also analyzed the relative impact of firm versus CEO-factors on firm performance following an acquisition.

Lee and his co-authors found that although CEO‐level factors and firm‐level factors both explained a substantial portion of the variance in firm M&A behavior, CEO factors mattered substantially more, having up to 1.48 times more impact on the variance of a firm’s acquisition behavior than firm-level factors. Their results also suggested that CEO-level factors contribute more than firm-level factors to the post-merger performance of firms. 

“I think these results highlight the importance of human capital. CEO are not just ‘rubber stampers;’ their characteristics and experience seem to be crucial factors that drive firm behavior and performance,” says Lee.