Efficient Labor and Capital Markets: Evidence from CEO Appointments

An examination of 268 CEO appointments in U.S. firms indicates that, on average, appointment of a better-quality CEO (a CEO who receives a pay premium ex-ante) is accompanied by an immediate positive revaluation of stock prices, and is followed by an improvement in firm performance. This evidence supports the notion of jointly efficient and integrated labor and capital markets. The findings are particularly strong in non-regulated industries. The managerial labor market appears somewhat less efficient in internal successions, and the stock market appears less efficient or relatively weakly integrated with the labor market in small firm appointments.