Unraveling the Corporate “Black Box”: How Do CEOs Create Value for Their Firms?

A much debated issue in corporate finance is how idiosyncratic managerial attributes affect firm value. Using CEO turnover as an identification mechanism, we empirically identify the effect of CEO human capital on firm value and show that this effect can be partially explained by the reduction in bankruptcy costs and also by various firm-policy changes related to CEO human-capital. In particular, we show that when a CEO with transferable (general) human capital is matched with a firm relying more on general skills, the firm reduces leverage, invests less in intangibles and increases the operational efficiency, relative to firms relying more on CEOs with firm-specific skills. Changes in firm policies lower business risk and reduce the costs asso-ciated with financial distress. These findings are economically significant and are not driven by endogeneity, sample selection, and reverse causality. Our results suggest that CEO human cap-ital affects firm value, and illustrate possible channels through which managerial human capital creates firm value for corporate stakeholders