Firm performance depends to a large extent on management practices, with the selection of the top manager (CEO) being a determining factor. Firms seek to choose the best candidate, but the circumstances prevailing in the economy may determine the choice of different profiles. Indeed, the CEO selection process implies a choice between insiders - who have already accumulated more experience in the firm, but may find it more difficult to abandon settled management practices in light of unexpected circumstances - and external hires who can innovate in their response to new challenges, but who start with a knowledge deficit.

Based on the performance of Portuguese firms during the sovereign debt crisis, Sazedj et al. (2018) found that newcomer CEOs performed relatively better than their higher tenured peers. The graph illustrates that in the period prior to the crisis there is no statistically significant difference in the GVA of these firms. However, during the crisis, firms run by newcomer CEOs have around an 18% higher GVA than other firms. These results suggest that in times of crisis accumulated experience in the firm is less important than the flexibility and willingness to take risks, more characteristic traits of a newcomer CEO.

For more details see Sazedj et al. (2018): “CEO performance in severe crises: The role of newcomers”, Banco de Portugal, Working Paper, No 21/2018.

Prepared by Sharmin Sazedj. The analyses, opinions and results expressed above are those of the author and do not necessarily coincide with those of Banco de Portugal or the Eurosystem.

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