The use of variance decomposition in the investigation of CEO effects: How large must the CEO effect be to rule out chance?
Article first published online: 26 NOV 2013
Copyright © 2013 John Wiley & Sons, Ltd.
Strategic Management Journal
Volume 35, Issue 12, pages 1839–1852, December 2014
How to Cite
Fitza, M. A. (2014), The use of variance decomposition in the investigation of CEO effects: How large must the CEO effect be to rule out chance?. Strat. Mgmt. J., 35: 1839–1852. doi: 10.1002/smj.2192
- Issue published online: 27 OCT 2014
- Article first published online: 26 NOV 2013
- Accepted manuscript online: 19 SEP 2013 09:49AM EST
- Manuscript Accepted: 11 SEP 2013
- Manuscript Revised: 30 AUG 2013
- Manuscript Received: 21 JUL 2012
- variance decomposition;
- CEO effect;
- sources of performance heterogeneity;
Variance decomposition analysis is often used to examine the degree to which CEOs influence their companies' performance (the so-called CEO effect). Such studies play an important role in a body of literature that investigates the effect of leadership on organizations. In this paper, I argue that these previous studies have an important underlying flaw. Empirically, these studies wrongly attribute the performance effect of randomness—of chance—to the CEO. I demonstrate how randomness can affect the measured effects in a variance decomposition analysis, and I show that this is especially problematic for the measurement of CEO effects. I demonstrate how this results in a greatly inflated CEO effect and develop an approach to correct for it. Copyright © 2013 John Wiley & Sons, Ltd.