Managerial Legacies, Entrenchment, and Strategic Inertia




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    • Both authors are from the Toulouse School of Economics and the Institut d'Administration des Entreprises (University of Toulouse I). Casamatta is also at the Europlace Institute of Finance. We would like to thank Bruno Biais, Roberta Dessì, Andrea Eisfeldt, Guido Friebel, Denis Gromb, Margaret Kyle, Thomas Mariotti, Colin Mayer, Meg Meyer, Jean Charles Rochet, Elu von Thadden, Lucy White, an anonymous referee, the associate editor of this journal, and seminar participants at Nuffield College, Mannheim University, Saïd Business School, the 4th Corporate Finance workshop at the LSE, the EFMA 2005, ESSFM Gerzensee 2005, the 10th Anniversary Finance Meeting of CEMAF/ISCTE, and the AFA 2006 for helpful comments. Casamatta would like to thank the EIF for financial support. This project was started while Guembel was at the University of Oxford and he gratefully acknowledges funding received there by the Michael Zilkha Trust (Lincoln College) and the Corporate Reputation Center (Saïd Business School). All remaining errors are ours.


This paper argues that the legacy potential of a firm's strategy is an important determinant of CEO compensation, turnover, and strategy change. A legacy makes CEO replacement expensive, because firm performance can only partially be attributed to a newly employed manager. Boards may therefore optimally allow an incumbent to be entrenched. Moreover, when a firm changes strategy it is optimal to change the CEO, because the incumbent has a vested interest in seeing the new strategy fail. Even though CEOs have no specific skills in our model, legacy issues can explain the empirical association between CEO and strategy change.