DO HIGH-ABILITY CEOS MATTER TO SHAREHOLDERS? EVIDENCE USING A UNIQUE MEASURE FOR CEO ABILITY

I examine the effect of CEO ability on firm performance. My analysis uses a unique measure of CEO ability that is based on CEOs’ commitment decisions in U.S. presidential elections. Intuitively, CEO ability is measured based on how well they forecast U.S. presidential elections, one year prior to the race, relative to the candidates’ expected chances of winning. I find that this measure of CEO ability is positively related to firm performance. Interestingly, high ability CEOs have a greater impact on Tobin’s Q in small firms than in large firms. Yet, high ability CEOs have the greatest dollar impact on shareholder value in large firms. Lastly, I provide evidence that CEO ability is also related to the CEOs’ compensation contracts, in the notion that high ability CEOs are rewarded with higher levels of cash-based compensation and stock-based incentives, as well as higher levels of total compensation.