Dupes or Incompetents? An Examination of Management's Impact on Firm Distress

Authors

  • J. Tyler Leverty,

    1. J. Tyler Leverty is an Assistant Professor, TRISTAR Risk Management Fellow in the Department of Finance, Henry B. Tippie College of Business, University of Iowa. Martin F. Grace is the James S. Kemper Professor in the Department of Risk Management & Insurance, Georgia State University. The authors can be contacted via e-mail: ty-leverty@uiowa.edu and mgrace@gsu.edu, respectively.
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  • Martin F. Grace

    1. J. Tyler Leverty is an Assistant Professor, TRISTAR Risk Management Fellow in the Department of Finance, Henry B. Tippie College of Business, University of Iowa. Martin F. Grace is the James S. Kemper Professor in the Department of Risk Management & Insurance, Georgia State University. The authors can be contacted via e-mail: ty-leverty@uiowa.edu and mgrace@gsu.edu, respectively.
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  • We would like to thank the anonymous referees, Stephen D’Arcy, David Bates, Matthew Billett, Kenneth Froot, Jon Garfinkel, Richard Green, Anne Gron, Don Hausch, James Kau, Robert Klein, Arthur Murton, Richard Phillips, Laura Starks, and seminar participants at the National Bureau of Economic Research Insurance Working Group, Georgia State University, San Diego State University, Virginia Commonwealth University, University of Georgia, University of Iowa, and University of Wisconsin-Madison for helpful comments and suggestions.

Abstract

This article examines whether managers impact firm performance. We conservatively define managerial ability as the manager's capacity to deploy the firm's resources. We verify the validity of our metric using a manager–firm matched panel data set that allows us to track managers (CEOs) across different firms over time. We find managerial ability is inversely related to the amount of time a firm spends in distress, the likelihood of a firm's failure, and the cost of failure. These results suggest that the managers of failed firms are less skilled than their counterparts. But even within failed firms there is heterogeneity in the talents of managers.

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