This study shows that CEO tenure has positive and robust predictive power on cross-sectional stock returns.

We show that a hedge portfolio constructed based on CEO tenure yields an annualised alpha of 1.32% and attribute this to seasoned CEOs having greater firm-specific knowledge and experience.  Consistent with this explanation, we find that CEO tenure has greater incremental impacts on firms with greater information asymmetry.

Finally, we also investigate the underlying mechanisms in the tenure–stock returns relationship and find that investors overreact to new CEOs and underreact to seasoned CEOs. In addition, we show that new CEOs rely more heavily on the market trends, whereas seasoned CEOs are more likely to differentiate themselves from their counterparts and rely less on trends in the market.

Overall, our findings suggest that CEOs positively influence firm stock returns through greater firm-specific knowledge and experience.

By: Minhao Leong (The University of Sydney), Xianzhen Chen (The University of Sydney, Business School, Discipline of Finance, Students) and Xinyuan Yao (PwC; Strategy&)

Read the entire SSRN article here