External hire premium

Key findings

The controlled estimates, the models behind them, and the same question asked in a second market.

Headline

The premium does not predict the return.

Among external hires, the amount paid over the departing CEO does not signal the return that follows. It holds after controls for firm size, year, and industry. It holds when the return is measured only after the hire. It is the most robust result in the study, because it is a within-relationship slope, not a level comparison, so the selection of troubled firms does not drive it.

What holds

Pay does not buy return

Premium to stock return: p = 0.14. Premium to operating return: p = 0.45. Both indistinguishable from zero, under full controls and a post-hire window.

What does not hold

Cost more, deliver less

The cost premium is directional but imprecise. The weaker returns are mostly selection. The flashy claim does not survive scrutiny.

The numbers

Every estimate, with its verdict

QuestionMeasureEstimateVerdict
Cost more?pay vs. predecessor, controlled+9% (p = 0.54)directional, not precise
Worse stock performance (raw window)?market-adjusted TSR, −2/+3yr−38 pts (p < 0.001)confounded by selection
Worse stock performance (after the hire)?market-adjusted TSR, hire to +3yr−12 pts (p = 0.14)not significant
Worse operating performance?ROA change−2.5 pts (p = 0.009)small, real
Premium predicts return?return on premium, controlled≈ 0 (p = 0.14 / 0.45)No. holds.
Shorter tenure?Cox hazard, externalHR 1.28 (p = 0.20)not significant

The models

What sits behind the numbers

Each uses robust (HC1) errors. Controls are firm size (log assets), appointment year, and two-digit SIC industry.

The premium. Do external hires cost more?

log( paysucc / paypred ) = β·External + controls + ε

β = +0.088, p = 0.54, n = 236. Bidwell-sized, not significant on the mean, significant on the median test (p = 0.007).

The return, after the hire. Do external hires deliver worse?

TSRpost = β·External + controls + ε

β = −0.119, p = 0.14, n = 431. The full straddling window gave −0.385 (p < 0.001); most of that was inherited decline. ROA change keeps a small effect: −0.025, p = 0.009.

The headline. Does the premium predict the return?

Return = β·log( paysucc / paypred ) + controls + ε

β ≈ 0, p = 0.14 (stock), 0.45 (operating), n = 189. The slope is flat.

Tenure. Do external hires last as long?

h(t) = h0(t) · exp( β·External + controls )

hazard ratio = 1.28, p = 0.20. Directionally shorter, not significant.

Selection

What kind of firm hires from outside

External hires concentrate in firms whose stock lagged the market, not firms in operating crisis, and not in every case. This is measured, not assumed.

  • Pre-hire stock: external median −18 pts vs market, internal −2 pts (p < 0.001)
  • Pre-hire operating (ROA): external 7.2%, internal 5.7% (p = 0.91, no difference)
  • Spread: 70% of external hires followed below-market stock, 30% above

Two markets, one answer

The executive market and sports free agency agree

Both price outside talent off a recent peak that tends not to last. The CEO work leads. The sports studies corroborate.

MarketPremium paid forPredicts return?Key statistic
CEO hires, S&P 500external pay over predecessorNopremium to return p = 0.14 / 0.45
NHL free agencyoffseason UFA spendNoprior to next slope −0.42, p < 0.001
NFL free agencytop-spender statusNotop spender is not top win-gainer
NBA supermaxsupermax contractNopenalty vanishes with controls
NHL play-for-contractcap share, retentionretention winssame-team +0.70, p < 0.0001

Sports studies are prior TMG analyses, cited, not re-run here. KPIs are analogous, not identical. The strength is convergence across unlike markets.