Serial CEOs and Managerial Ability: Do Venture Backed Companies Have a Comparative Advantage?

• In Event: Governance and Managerial Ability

Abstract

ABSTRACT: This paper examines the relationship between serial chief executive officers (CEOs), venture capital support, and company performance. One crucial task of venture capitalists, or any stakeholder, is to find talented executives to lead their companies. However, finding quality CEOs for young growth companies with a relatively short financial history can be a difficult endeavor. Venture capitalists may have a comparative advantage in this area because many network within the venture capital industry to “recycle” CEOs (De Carvalho, Calomiris, and de Matos 2008). In other words, venture capitalists network to hire CEOs who already have CEO experience at a different venture backed company. This provides venture capitalists with a unique opportunity; to hire serial CEOs with venture capital industry specific experience. Therefore, this study considers the following research questions: (1) Are recycled CEOs better abled than other CEOs, and (2) do recycled CEOs have a positive relationship to future firm performance? To address this question, I use a hand collected sample of serial CEOs (CEOs with prior CEO experience), and recycled CEOs (serial CEOs at venture backed companies) to examine their relationship with managerial ability and future firm performance. Although there is literature to support the positive association between CEOs and firm performance (Demerjian et al. 2012; Demerjian, Lev, Lewis, and McVay 2013), little analysis of recycled CEOs is available. Using various univariate and multivariable tests, I find evidence that recycled CEOs have a positive association to future managerial ability and provide incremental explanatory power over venture backing with respect to future management quality and firm profitability. These findings provide evidence that recycled CEOs provide future benefit to the companies they lead and that venture capital success may be due in part to the ability of the CEOs and not just to venture capitalist oversight.

Author

• Sydnee Manley, Providence College