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CEO General Skills and Firm Performance:
What Does An External CEO Bring to the Table?
Varouj Aivazian Tat-kei Lai Mohammad Rahaman∗
July 10, 2009
Abstract
Economists disagree on the reason for the dramatic rise in executive compensation in recent decades. In
this paper, we focus on a market-based explanation for this trend and design an empirical strategy to
identify the effect of CEO general skills on firm performance. We show that executive compensation and
external CEO hiring are both significantly positively correlated with the importance of general skills at
the industry level. We find that newly hired external CEOs in industries relying more on general skills
create more shareholder value relative to the industry median than do newly hired internal CEOs in
similar industries. The differential effect on firm performance increases in favor of external CEO-firms
as general skills become more important in the industry. Furthermore, we use a mediating instrument
methodology to identify the strength and significance of the impact of CEO skills on firm performance
and show also that better performance in turn explains the excess in CEO compensation relative to the
typical firm in the industry. These findings are economically significant and do not seem to be driven by
endogeneity, sample selection, and reverse causality. Our results suggest that CEO skills have a bearing
on firm performance and are correctly priced into executive compensation contracts.
JEL Classification: G30, J40

Key Words: CEO Turnover, CEO Skills, CEO Compensation, General Skills
∗ Varouj Aivazian is from the Department of Economics and Rotman School of Management, University of Toronto. Tat-kei
Lai is from the Department of Economics, University of Toronto. Mohammad Rahaman is from the Department of Economics
and Rotman School of Management, University of Toronto. Varouj Aivazian can be reached at varouj.aivazian@utoronto.ca,
Tat-kei Lai can be reached at tk.lai@utoronto.ca, and Mohammad Rahaman can be reached at m.rahaman@utoronto.ca.
Aivazian, Lai, and Rahaman CEO Skills and Firm Performance
1 Introduction
There is substantial disagreement in the academic literature on the causes for the substantial rise in exec-
utive compensation in recent years.1 Bebchuk, Fried, and Walker (2002) argue that the escalation in CEO
pay levels reflects a dysfunctional governance system which fails to check the power of entrenched CEOs.
Spectacular governance failures at firms such as WorldCom, Tyco, and Enron, have reinforced the view of
CEOs expropriating corporate assets at shareholders’ expense.
By contrast, Holmstrom and Kaplan (2003) argue that the US corporate governance system works relatively
well and that any defects associated with the CEO salary structure are more than offset by the competitive
advantage of the US corporate governance system. Murphy and Zábojnı́k (2007) provide a market based
explanation for the significant rise in executive compensation over the past three decades. They argue
that CEO salaries are determined by competition among firms for executives, and are dependent upon
transferable CEO skills across firms and industries. They posit that increases in executive compensation can
be explained by increases in the importance of general, as distinct from firm-specific, skills in the management
of corporations.
We extend the extant literature in three important dimensions. First, we utilize the Murphy and Zábojnı́k
(2007) model to show that as CEOs’ general or transferable skills increase in importance in the economy
relative to firm-specific skills, the performance of firms with external CEOs improves disproportionately
more than that of firms with internal CEOs. Second, we construct a novel measure of the importance of
general skills at the industry level and use this measure to empirically identify the effect of CEO general
skills on firm performance. Finally, we show empirically that CEO general skills do contribute to higher
firm performance leading in turn to higher CEO compensation. Our approach supports the market-based
explanation of executive compensation and, to the best of our knowledge, is the first to empirically address
that theory.
Although CEO skills are difficult to observe, we can, for analytical purposes, decompose them into firm
specific skills (CEO human capital specific to the firm) and general skills (CEO human capital transferable
across firms and industries).2 In a competitive executive labor market, these skill components are priced into
1 Daines et al. (2005) report that in 1992 the average CEO of an S&P 500 firm earned $2.7 million. By its peak in 2000,
average pay for these CEOs had increased to over $14 million can increase of more than 400%. The increase in CEO pay is
more striking in relative terms. Twelve years ago, CEOs at major US corporations were paid 82 times the average earnings of
a blue collar worker; in 2004 they were paid more than 400 times the average blue collar worker.
2 Bertrand and Schoar (2003) show that a significant extent of the heterogeneity in investment, financial, and organizational
practices of firms can be explained by the presence of manager fixed effects. In hindsight, these results suggest that managers
exert significant amount of control over various corporate decisions but do not really decompose the managerial skills into
general and firm specific.
2
executive compensation contracts. As general skills become relatively more important and the demand for
CEOs with more general skills (external CEO) increases, the price or compensation for such CEO services
is pushed up. This is the fundamental insight of the market-based theory explaining the upward trend in
external hiring and executive compensation in recent decades [Murphy and Zábojnı́k (2007)]. We extend the
Murphy and Zábojnı́k (2007) model to show that any shortfall in expected profits from hiring an external as
opposed to internal CEO decreases with an increase in the relative importance of general skills. We relate
the importance of general skills and CEO type (internal versus external CEO) to firm performance and use
firm performance as the channel linking CEO skills to CEO compensation.
We employ measures relating to general purpose technology at the industry level to proxy for the importance
of CEO general skills. We argue that an increase in the use of general purpose technology in an industry
increases the warranted level of general managerial skills for firms in the industry. That the pervasiveness
of general purpose technologies in an industry makes an external CEO with general skills more productive
than an internal CEO with more firm-specific skills. We use data on industry-level information technology
(computerization) to construct our measure of the intensity of industry general purpose technology and of
the importance of CEO general skills. We show that executive compensation and external CEO hiring are
both significantly positively correlated with our proxy measure of the importance of general skills.
We find, after controlling for various sources of firm heterogeneity (such as firm size, corporate governance,
and firm-CEO matching quality) and for industries relying more on general skills, that firms hiring external
CEOs have higher stock returns than those hiring internal CEOs. Moreover, the wedge between the stock
returns of external versus internal CEO firms increases with the importance of general skills in the industry.
The results are important in view of the fact that (as shown in Figure 2) the level of computerization
in different industries has increased over the sample period, while a considerable amount of heterogeneity
remains across industries within any particular sample year. Our results are economically significant: a one
standard deviation increase in computer stock per worker (about $4,573) increases the post-turnover market
performance of the external CEO firm by more than 15 to 20 percentage points relative to a firm with an
internal CEO, and a one standard deviation increase in computer investment per worker (about $2,549)
increases the post CEO-turnover performance of the external CEO firm by more than 14% to 18% compared
to a firm with an internal CEO. The results also suggest that an increase over time in the warranted level of
CEO general skills translates into higher CEO compensation, all else being equal. Our results are robust to
various alternative specifications and do not seem to be driven by endogeneity and sample selection problems.
This paper contributes to the existing literature in three ways. First, it relates CEO type to firm performance
by identifying a specific channel (importance of general skills) through which CEO type can affect firm
3
performance. Second, it estimates the effect of changes in the general-skill component of CEO skills on
firm performance via a novel measure of the importance of general skills. Finally, it establishes a clear link
through which CEO general skills can affect firm performance, which in turn can explain the trends in CEO
compensation. The paper provides direct evidence for the market-based explanation of the rise in executive
compensation.
The rest of the paper proceeds as follows. Section 2 briefly discusses the related literature on managerial
skills. Section 3 develops a framework of analysis with a simple economic model. Section 4 discusses the
empirical strategy, while Section 5 discusses the data and construction of various variables. Section 6 reports
the estimation results and various robustness tests. Section 7 develops and tests the linkage between CEO
skills and firm performance linking performance to CEO compensation. Section 8 concludes the paper.
2 General Purpose Technologies and Managerial Skills
A major empirical challenge in studying the relationship between CEO skills and corporate outcomes such
as firm performance, CEO hiring decisions, and CEO compensation, is to have an accurate measure of CEO
skills. Simple measures such as CEO age, tenure in the firm, and educational background are commonly
used as proxies for CEO skills in a univariate analysis. For example, Murphy and Zábojnı́k (2007) argue that
the decline in the CEO tenure in the firm (as a proxy for the CEO’s firm-specific skills) and the increase in
the proportion of CEOs with MBA degrees (as a proxy for the CEO’s general managerial abilities) in recent
years are evidence of their conjecture that CEO general skills have become relatively more important than
firm-specific skills.
Such skill measures are far from accurate and financial economists have sought better measures to study
the relationship between CEO characteristics and firm outcomes of interest. For example, Frydman (2006)
collects data from various biographical sources on executives’ backgrounds, including education and career
paths, to construct an index of executive general human capital. She argues that this index reflects the
increasing importance of general human capital, and uses it to explain the increasing wage inequality among
top managers within firms and the increasing mobility of senior executives across firms. Graham, Li, and
Qiu (2008) construct their skill measure by decomposing executive compensation into firm and manager
components, and they argue that firms hiring CEOs with larger compensation fixed effects will improve
their performance. Rost, Salomo, and Osterloh (2008) use a measure depicting dishonesty of the departing
CEO and argue that an increase in this measure makes external CEO hiring more likely.
Another burgeoning literature labelled “skill-biased technological change” provides theoretical explanations
4
and empirical evidence showing a positive relationship between technological development and worker skills.
On the theoretical side, Bresnahan (1999), for example, argues that there is complementarity between
computers and workers who possess cognitive and analytical skills. His idea is that, while it is easily to
replace human workers with computers in routine tasks, it is very costly if not impossible to program a
computer to perform as efficiently as a human in the domain of decision making. Therefore, he argues, the
greater use of computer technology will raise the demand for skilled workers.
Using a model of the relationship between information technology and organizational structure, Garicano
and Rossi-Hansberg (2006) suggest that information technology lowers workers’ cost of acquiring knowledge
for the workers as well as their costs of communication in different layers of the firm. They argue that
a reduction in these costs induces managers to acquire more general skills. Articles by Autor, Katz and
Krueger (1998) and Bresnahan, Brynjolfsson and Hitt (2002) report evidence on the relationship between
the demand for skilled workers and the development of information technology. These authors use data on
industry computer use in the School Enrollment Supplements to the Current Population Survey for October
1984, 1989 and 1993. They find that industries with the greatest increase in computer use experienced
the largest increase in employment of college-educated workers. Using firm-level data generated from their
survey and the Computer Intelligence Infocorp installation database for 379 firms in the Fortune 1000 list,
Bresnahan et al. (2002) also find a positive relationship between computer use and the hiring of workers
with more general skills. Caroli and Van Reenen (2001) also find evidence in support of a complementarity
between technological change and organizational change (in terms of decentralization of authority, delayering,
and increased multi-tasking) for British and French establishments in the 1980s and 1990s.
The foregoing two different strands of literature suggest that exogenenous technological change affects the
incentives of managers to acquire certain skills. Thus, understanding the effect of managerial skills on firm
performance requires an understanding of the process of technological evolution in the firm’s industry. In
this paper, we adopt an identification strategy that isolates the effect of managerial general skills on firm
performance via the channel of exogenous evolution of general purpose technologies in the firm’s industry.
We use industry-level computerization and information technology intensity as proxies for general purpose
technologies, and interact these with CEO type (external versus internal) to identify the type of CEO skills
better suited to the firm.
Why are measures of computerization and information technology intensity good proxies for the importance of
general skills? We provide three economic justifications for this. First, computer and information technologies
tend to affect the traditional boundaries of firms.3 Skills that were deemed to be firm specific are no longer
3 See, for example, Hitt (1999) for an empirical study on the relationship between information technology and firm boundaries.
5
so, and with the advent of computer and information technologies increasingly many tasks have become
more general making blurry the demarkation between firm-specific and general skills. Murphy and Zábojnı́k
(2007) argue that,
“[S]kills required to being an effective CEO have changed in recent decades as CEOs have be-
come increasingly focused on external constituencies and less focused on internal operations. The
shareholder-rights movement beginning in the late 1980s and the increased ownership of large
institutional investors has forced CEOs to lead their companies’ investor-relation efforts, com-
municating directly with shareholders and institutions. The emergence of around-the-clock news
organizations requires CEOs, as their companies’ top spokesperson, to be experts in communicat-
ing with both print and broadcast media. Also, more than in the past, CEOs of firms relying on
capital markets for debt and equity issues must learn to communicate with the capital markets
and deal with stock analysts and other external constituencies that affect share prices. These
external relation-skills are largely general and not specific to a given organization, and boards
demanding these skills will predictably look outside to fill CEO openings.”
We argue that the primary force underlying these shifting patterns in the role of the CEO is the revolutionary
development in computer information technology.
Second, with computerization and improvements in information technology firm-specific data that were once
difficult to access can now be stored in rich corporate databases. With easy access, sorting and analysis of firm
specific information have become less important for a present-day CEO reducing the level of effort required
for acquiring firm-specific knowledge. Thus, computerization and the advent of information technology are
rendering the firm-specific skills of the CEO less important while the general skills component of the CEO
skills set are becoming increasingly important to the firm.
Finally, as general skills become relatively more important, firms with a comparative advantage in pro-
ducing output utilizing more intensely CEO general skills should perform better than those relying less on
such skills. Thus, if computer and information technologies are good measures of the importance of general
skills, they should explain performance heterogeneity across firms in a given industry. Indeed, Chun et
al. (2008) show that traditional US industries with higher performance heterogeneity use information tech-
nology (IT) more intensively and post faster productivity growth in the late 20th century. They argue that
firm performance heterogeneity reflects a wave of creative destruction in an industry, with newly successful
IT adopters outperforming established firms. However, Chun et al. (2008) lacks an explanation of the linkage
between information technology and firm performance. We argue that managerial skills provide the missing
6
link. Managers with transferable knowledge of computer and information technology (general skills) are in
a better position to exploit the fast-paced innovations in these industries.
3 A Simple Economic Model
In this Section, we briefly explain the partial equilibrium CEO-hiring model of Murphy and Zábojnı́k (2007)
and show that when general skills become more important, the excess of a firm’s expected profits from hiring
an internal CEO over an external CEO decreases.4
Formally, we follow Murphy and Zábojnı́k (2007) and assume that each firm hires one CEO and n production
workers with the following profit function:
π(n, a, s) = f (n)sa − wn − wM (a) (1)
where f (·) is the production function with f 0 (·) > 0 and f 00 (·) < 0, a is the ability of the CEO, wM (a) is the
market wage for a CEO with ability a, w is the market wage for production workers, and s captures whether
the CEO is internally promoted or externally hired: s = 1 if the CEO is internally promoted and s = γ < 1
if she is externally hired.5
Assume that there is free entry of firms and that a CEO can always set up a firm that is best matched with
her ability a. Therefore, a CEO with ability a must be paid at least ψ(a) = f [n∗ (a)]γa − wn∗ (a), where
n∗ (a) is the optimal size of the firm set up by the CEO. Since a CEO can choose to be a production worker
and receive a wage w, the market wage for a CEO with ability a is given by:
wM (a) = max {w, ψ(a)} = max {w, f [n∗ (a)]γa − wn∗ (a)}. (2)
The firm’s optimal hiring decision is as follows. If the firm hires an external CEO with ability a∗ that is the
best match given its size, i.e n = n∗ (a∗ ), then the firm’s profit will be exactly zero: π E = 0.6 If the firm
has an internal employee with ability â such that π I = π(n, â, 1) ≥ 0, then the firm will promote him as the
CEO. When a firm hires the internal CEO, it can make full use of the CEO’s ability for production. But if
the CEO works for another firm, only γâ of her ability is valued by the market. Therefore, a firm’s profit
is positive when an internal CEO is hired. These results are shown graphically in Figure 1.7 We restrict
4 Murphy and Zábojnı́k (2007) also have a general equilibrium version of the model, and its theoretical predictions are
basically the same.

5 The parameter γ ∈ (0, 1) measures the importance of general skills relative to specific skills, and the higher γ is, the more
important general skills are.

6 This can be seen from (1) and (2): π E = π [n∗ (a∗ ), a∗ , γ] = f [n∗ (a∗ )] γa∗ − wn∗ (a∗ ) − w M (a∗ ) = 0.
7 This figure is based on Figure 6 of Murphy and Zábojnı́k (2007).
7
our attention to the case when the relative importance of general skills is γL . In this case, the firm earns a
positive profit if the internal candidate’s ability â is between aL (γL ) and aH (γH ). In other words, the firm
will hire an internal CEO if â ∈ [aL (γL ), aH (γH )]; otherwise it will hire an external CEO.
Proposition 1 The excess of a firm’s expected profits from hiring an internal CEO over an external CEO
is decreasing with the importance of general skills.
Proof From Figure 1, we can see that when general skills become more important (γ increases), the market
wage of CEO goes up because ψ(a) shifts up, and the threshold value aL stays the same but aH becomes
smaller. The expected difference between the profits of hiring an internal and an external CEO when the
importance of general skills is γL is the area ABL CL , and that when the importance of general skills is γH
is the area ABH CH . The area becomes smaller when γ increases.8 Q.E.D.
[Figure 1 is about here]
The intuition for the above result is as follows. A firm with a vacant CEO position faces the tradeoff
between promoting an internal candidate and hiring an external CEO. Internal promotion capitalizes the
CEO’s firm-specific knowledge, but this comes at the risk of not getting the best possible CEO for the job.
When general skills become relatively more important (relative to firm-specific skills), the costs of external
CEO hiring (foregone internal CEO’s firm-specific knowledge) decrease and in turn increase the likelihood of
firms with vacant CEO positions hiring external CEOs as opposed to internal CEOs. Besides, competition
among firms to hire the best possible CEO enables a CEO to extract maximum rent from her employer
which in turn drives down firm’s profit to zero, but the CEO’s general skills become fully priced into the
compensation contract. Furthermore, the firm-specific knowledge of the internal CEO is less valuable so that
the advantages of firms with internal CEOs relative to firms with external CEOs diminish.
4 Empirical Strategy
The economic framework of the previous section posits that the excess profits of an internal CEO firm over
an external CEO firm decreases as general skills become more important. In our empirical strategy we argue
that as the difference in economic profits shrinks (in favor of the external CEO firm), we observe a change
in the stock returns of these firms. When general skills become relatively more important, an external CEO,
on average, should add more value to the firm than an internal CEO.
8A formal proof is in the Appendix.
8
We estimate the following two linear models:
F IRM P ERijt = α̃ + β˜1 .GP Tjt + β˜3 .EXTijt + Xijt

0
.δ̃ + µj + νt + εijt (3)

0
F IRM P ERijt = α + β1 .GP Tjt + β2 . GP Tjt × EXTijt + β3 .EXTijt + Xijt .δ + µj + νt + εijt (4)
where i indexes a firm-CEO pair, j indexes industry and t indexes time. Besides, F IRM P ERijt is the
performance of the firm between years t + 1 and t + 2 attributed to the CEO in period t, GP Tijt is a measure
of general purpose technology at the industry level (which is a proxy for the importance of general skills as
we argue), EXTijt is the external CEO hire dummy, Xijt consists of other control variables, and µj and νt
are industry and year fixed effects respectively.
In the first model, we look at the “level” effect of importance of general skills and external CEO status on
firm performance. In the second model, we examine the “second-order” effect, i.e., the interaction of the
importance of general skills and external CEO status, on firm performance. Such an effect is captured by
the coefficient β2 , and from the economic framework discussed earlier, we expect that β2 > 0.
We first estimate the above two models using the “Turnover Sample” which includes observations of newly
appointed CEOs only. For robustness checks, we use another sample called “Whole Sample” which includes
both newly appointed CEOs and incumbent CEOs. The precise definitions of the two samples and the
definitions of the variables will be explained in Section 5.
5 Data and Variables
5.1 Sample Construction
We begin with the universe of firms that have been listed in the S&P 500 Index for at least one year
between 1992 and 2006 which form the “Whole Sample”. These firms are identified from the S&P 500 Index
Constituents database in COMPUSTAT.9 We focus on the S&P 500 constituents for three reasons. First,
S&P 500 firms are widely viewed as broadly representative of the US industrial and service sectors. Thus,
any empirical regularities identified in this sample could be generalized to some extent to other firms as well.
Second, to be included in the S&P 500 constituency a firm has to perform above a certain threshold that in
turn makes the sample firms homogeneous along some quality (performance) dimensions. Focusing on this
quasi-homogeneous (in terms of firm quality) sample of firms lessens the possibility of endogeneity driven
9 We include the firm in the Whole Sample if it is listed in the S&P 500 Index in December of each year between 1992 and
2006.
9
by some unobserved firm characteristics that may confound the identification of the regression coefficients
discussed in the previous section. Finally, some of the CEO characteristics are hand-collected, and it is
simply practical to focus on a manageable sample and we focus on the S&P 500 constituents.
For each observation in the Whole Sample, we identify the CEO of each firm from the “CEOANN” variable
in the COMPUSTAT ExecuComp database. We select the newly appointed CEOs from the Whole Sample
to form the “Turnover Sample”. A newly appointed CEO is identified if the CEO in year t is different from
the CEO in year t − 1 for a firm in the S&P 500 constituency. We also differentiate among a newly appointed
internal CEO, an external CEO, and an incumbent CEO.10 Therefore, a CEO in the Turnover Sample is
either an internal hire or an external hire. The rest of the CEOs in the Whole Sample who are not in the
Turnover Sample are considered as incumbent CEOs. For example, a newly appointed external CEO in year
t is included in both the Turnover Sample and the Whole Sample. However, if she stays in the same CEO
position in year t + 1, she is treated as an incumbent CEO in the Whole Sample but does not appear in the
Turnover Sample.
In the empirical specification, we are interested to see how the CEO identified in year t affects firm perfor-
mance in year t + 1 and t + 2. Hence, we require that the CEO of a firm in year t to be in the same position
throughout years t + 1 and t + 2, and that the CEOs in years t − 1 and t − 2 are the same person. This
excludes interim CEO cases, and ensures that the CEO in year t is solely responsible for the firm performance
in years t + 1 and t + 2.
5.2 Variable Construction
We match the firm and CEO characteristics of each observation in the Whole Sample from various sources.
The firm characteristics are obtained from the COMPUSTAT’s Industrial Annual database and the Price,
Dividends and Earnings database. While the CEO characteristics mainly come from ExecuComp, we also
hand collect information from Marquis Who’s Who Directory, Forbes’ People Tracker, Factiva database, and
proxy statements of the firms.
5.2.1 External CEO Hire Dummy
We follow the standard practice in the literature to define an external CEO hire: a newly appointed CEO
is considered an external hire if her tenure in the current firm is less than or equal to one year when she
became the CEO. The tenure of the CEO is calculated by using the “date of becoming CEO” and “date
10 The definition of an external CEO hire will be explained below.
10
joined the firm” variables in ExecuComp.
5.2.2 Firm Performance Measure
The primary outcome variable of our analysis is firm performance during the first two years following the CEO
turnover. We use cumulative abnormal return (CAR) and industry-adjusted cumulative return (IACR) from
two subsequent years following CEO turnover as measures of firm performance attributed to the turnover.
We use a 2-year window to calculate cumulative return for two reasons. First, enlarging the event window by
more than two years to calculate the cumulative abnormal returns would make it difficult to rationalize that
the abnormal return is due to CEO turnover because over a longer horizon many other factors can affect a
firm’s abnormal performance other than the CEO turnover. Second, when the new external CEO has been
in the position for a long period, she will also acquire firm-specific knowledge so that the firm performance
reflects the contributions from both her general and specific skills. Thus, when a new CEO stays with the
current firm for more than two years we no longer treat the CEO as a new hire. In other words, all CEOs
with more than two years of tenure with the current firm are treated as incumbents for the purpose of our
analysis.
Cumulative Abnormal Return From COMPUSTAT data we calculate the stock return (including div-
idends) using the end of calender year share price. Using the shareholders’ return variable we construct the
following cumulative abnormal return of a firm’s post-CEO turnover performance:
t+2
X
CAR2ijt = Rijτ − R̃jτ (5)
τ =t+1
where CAR2ijt is the cumulative abnormal return of firm i in industry j for a CEO turnover in period t
using the return window between period t + 1 and t + 2, Rijτ is the stock return of firm i in industry j in
period τ , and R̃jτ is the median stock return for all firms in industry j in period τ .
Industry-adjusted Cumulative Return The second measure of firm performance is the industry-
adjusted cumulative return. We first define the 2-year cumulative return of firm i in industry j and year t
as
t+2
X
CR2ijt = Rijτ .
τ =t+1
Then the industry-adjusted cumulative return IACR2ijt is defined as:
IACR2ijt = CR2ijt − CR2

] jt (6)
11
where CR2
] jt is the median of the 2-year cumulative return for all firms in industry j.
These two measures of a firm’s post-CEO turnover performance is similar in the sense that they measure
the relative performance of the firm against the industry benchmark. They are different in the sense that
in (5) we allow the industry benchmark to be different in different periods while in (6) we fix the industry
benchmark and calculate the cumulative return against a fixed-median industry firm.
5.2.3 Importance of General Skills
The primary explanatory variable in our analysis is the importance general skills. We use industry-level mea-
sures of general purpose technology to proxy for the firm-level importance of general skills. More specifically,
we use a narrow measure of computerization and a broad measure of information technology intensity within
the industry to capture the prevalence of general purpose technology in the industry that in turn proxies
for the importance of general skills for firms operating in the industry. Econometrically, we need a measure
of the importance of general skills that is exogenous to the firm while not being excludable from being a
determinant of the firm’s post-CEO turnover performance. This is necessary to avoid the simultaneity and
endogeniety problem in estimating the firm’s post-CEO turnover performance. We argue that industry-level
computerization and information technology intensity capture the level of general purpose technology within
the industry and are important in understanding a firm’s performance (economic justification discussed ear-
lier) but at the same time, since the measures are at the industry level, we can avoid the the simultaneity
and endogeniety problem in estimating the firm’s post-CEO turnover performance.
We use data of private assets from the National Income and Product Accounts (NIPA) tables of the Bureau
of Economic Analysis (BEA) and the total number of workers in different industries from the Current
Employment Statistics (CES) published by the Bureau of Labor Statistics (BLS) to construct our proxies
for computerization and information technology intensity as measures of the importance of general skills.
We construct the following measures:
Stock of Computer Equipment & Sof tware

jt
Computer Endowmentsjt = log
T otal N umber of W orkersjt
Investment in Computer Equipment & Sof tware
jt
Speed of Computerizationjt = log
Stock of Computer & Communication Equipment & Sof tware
jt
IT Endowmentsjt = log
Investment in Computer & Communication Equipments & Sof tware
jt
Speed of IT Adoptionjt = log
where IT denotes Inf ormation T echnology, j refers to industry, and t refers to year. The stock and
12
investment measures of computer and information technology assets are in constant 2000 dollars.11 Figure
2 shows that computerization increases for all industries over the sample periods, but there remains a
considerable amount of variation across industries within a particular year. We utilize the between industry
variations in computerization to identify the CEO general skills effects on firm performance.
In terms of industry classifications, the firms in COMPUSTAT are classified either under the Standard
Industry Classification (SIC) system or the North America Industry Classification System (NAICS) industry
definitions. On the other hand, BEA uses its own industry classification system for their data. We make use
of the NAICS-SIC definition conversion tables published by the Census Bureau and our own conversion table
to convert the variables into consistent BEA industry classifications, so that our measures are comparable
across various industry classifications.
5.2.4 Other Control Variables
Industry-adjusted sales We define the industry-adjusted sales (in log) as the log of sales minus the
industry median log of sales. This variable is used to control for firm size.
Industry-adjusted returns on firm’s assets We use industry-adjusted returns on a firm’s assets to

control for the past performance of the firm. For any given year t we calculate the return on a firm’s assets
as : N et Income/T otal Assets for years t − 1 and t − 2 and cumulate the net assets returns to control for
the firm’s performance before the turnover in year t.
Corporate Governance Index To control for firm-level corporate governance, we use Gompers, Ishii,
and Metrick (2003) corporate governance score, generally known as the G index.12
Age of the CEO The age of the CEO is obtained from ExecuComp. However, ExecuComp does not
contain complete CEO information for all the firm-year observations. Whenever there is missing CEO
information but the name of the particular CEO is known, we search for the missing information from other
sources, including the Marquis Who’s Who Directory, Forbes’ People Tracker, Factiva database, and proxy
statements of the firms.
11 See US Department of Commerce (2003) for more details about the construction of a quality-adjusted price index for
computer and other equipment. To correct for potential measurement error problems in the computerization measures, we use
a 3-year centered average for each measure, i.e., the measure in year t is the average of that measure in years t − 1, t and t + 1.
12 The G index is derived from the incidence of 24 unique governance rules that proxy for the level of shareholder rights in
a firm. Gompers, Ishii, and Metrick (2003) show that an investment strategy of buying firms in the lowest decile of the index
(strongest rights) and selling firms in the highest decile of the index (weakest rights) would have earned abnormal returns of
8.5% per year during their sample period. They also find that firms with lower G index values (stronger shareholder rights)
had higher firm values, higher profits, higher sales growth, lower capital expenditures, and made fewer corporate acquisitions.
13
MBA dummy We check whether the CEO holds a Master of Business Administration degree or equivalent.
The information is hand-collected from the Who’s Who Directory and the CEO’s biography on the firm’s
internet site.
5.3 Summary Statistics
Excluding the outliers and observations with incomplete information on firm and CEO characteristics, we
obtain 4,441 firm-CEO observations in the Whole Sample and 565 firm-CEO observations in the Turnover
Sample.13 Table 1 displays the summary statistics of the outcome and other firm- and CEO-specific control
variables. Panel A shows the summary statistics for the Whole Sample and Panel B shows the summary
statistics for the Turnover Sample. Comparing the summary statistics between the Whole Sample and the
Turnover Sample reveals some differences in terms of the outcome and other explanatory variables.
[Table 1 is about here]
If the Turnover Sample firms are fairly representative of the Whole Sample we can focus on the cross-section
of turnovers and estimate our regressions. To investigate whether the turnover sample is in fact a random
sample of the population, we show the difference in the means and medians of the variables between the firms
in the Turnover Sample and the firms that are in the Whole Sample but not in the Turnover Sample (call it
the “Non-turnover Sample”) in Table 2. It shows that the firms in these two samples differ systematically in
terms of various control variables but not in terms of outcome variables. Notably, turnover sample firms have
worse corporate governance, poor operating performance for two consecutive years preceding CEO turnover,
and also have younger CEOs compared to the Non-turnover sample firms.
Of course, a firm could be in the Turnover Sample in one period and then in the Non-turnover Sample
in another period, but what Table 2 shows is that these firm- and CEO-specific control variables can sys-
tematically determine whether a firm is going to be in either of the samples in a given period. In other
words, the Turnover Sample may not be a random sample, and this may confound the identification in our
regression with a sample selection problem. Thus, we first estimate the regression outlined in the empirical
strategy section using the cross-section of turnover firms and then also with the whole sample that include
the turnover as well as non-turnover firms in the universe of S&P 500 constituents. Finally, in Table 3 we
13 To be precise, we exclude the observations in the 1% lower tail and 99% upper tail of the firm performance variables.
14
show the summary statistics of the computerization and information technology capital variables that we
use as proxies for the importance of general skills.
6 Empirical Results
6.1 Univariate Analysis
Figure 2 shows the trends in the industry-level computerization, executive compensation, and fraction of
external CEOs over total new CEOs during the sample periods. For each year, we calculate the average
computerization, average CEO wage, and the fraction of external CEOs across all firms and industries. We
then decompose these series into trend and irregular components using the Hodrick-Prescott (H-P) filter.
The H-P filter calculates the trend component by minimizing the following loss function:
T
X 2 T
X 2
Xt − X
et +λ Xt − Xt−1 − Xt−1 − Xt−2
e e (7)
t=1 t=3
where Xt is the actual series and X

et is the trend component of the series. The first term punishes the
(squared) deviations of the actual series from the trend; the second term punishes the (squared) acceleration
(change of change) of the trend level. The method thus involves a trade-off between tracking the original
series and the smoothness of the trend level: λ = ∞ generates a linear trend, while λ = 0 generates a trend
that matches the original series.14 After decomposing the actual series into trend and irregular components,
we plot the trend components over time in Figure 2.
It shows that both executive compensation and external CEO hiring trends are positively correlated with
the computerization and information technology intensities. The correlations among the trend components
are significant at 1%. We do not report the correlation here for the sake of brevity, and also because it is
quite obvious from Figure 2. Murphy and Zábojnı́k (2007) argue that executive compensation and external
CEO hiring are essentially driven by the importance of general skills over time while our extension of their
model shows that if it is so, then the excess in the expected profits of an internal-CEO hire firm over an
external-CEO hire firm would decrease as general skills become more important. While Murphy and Zábojnı́k
(2007) do not provide a direct proxy for the importance of general skills, we argue that computerization and
14 Ravn and Uhlig (2002) have shown that the smoothing parameter should vary by the fourth power of the frequency
observation ratios, so that for annual data a smoothing parameter of 6.25 and for monthly data a smoothing parameter of
129,600 is recommended, while for quarterly data a smoothing parameter 1,600 is commonly used.
15
information technology intensity measures can be good proxies for the importance of general skills and
Figure 2 shows that our proxies are correlated with the two outcomes of interest (executive compensation
and external CEO hiring) at the trend level. Although correlation does not imply causality, we are able to
proceed with these proxies to test the hypotheses that we develop in this paper.
[Figure 2 is about here]
6.2 Regression Results
Table 4 reports the regression results from the Turnover Sample using the industry-level computerization,
a narrow measure of the prevalence of general purpose technology within the industry. Columns 1 through
4 show the results for the first outcome variable CAR2ijt , i.e., the cumulative abnormal return of firm i in
industry j for a CEO turnover in period t using the return window between period t + 1 and t + 2. Columns 5
through 8 present the regression results for the second outcome variable IACR2ijt , i.e., the industry adjusted
cumulative return of firm i in industry j for a CEO turnover in period t using the return window between
period t + 1 and t + 2. We also control for industry and year fixed effects in the cross section of the CEO
turnover sample. Since there are multiple turnovers observation within the same industry in our sample, we
also cluster the observations by industries and report the robust t-statistics. Inclusion of industry and year
fixed effects means that between firm variations are mostly responsible for the statistical significance of the
reported coefficients in the table.
The most important piece of information in the table is the interaction-term coefficients (interaction between
the external CEO hire dummy and the computerization measures). These coefficients capture the effects
of computerization filtered through the external CEO dummy variable. We argued previously that general
purpose technology can be translated into higher firm performance if the CEO has more general skills. Thus,
the interaction-term coefficients identify the effect of the general component of the CEO skill matrix on firm
performance via the channel of general purpose technology proxying for the importance of general skills for
firms in a given industry.
After controlling for firm- and CEO-specific characteristics, the results show that a firm’s hiring decision
(external CEO hire dummy variable) does not have any statistically significant effect on firm performance.
The external CEO hire dummy variable captures the difference in performances between firms with external
CEOs and firms with internal CEOs. From the table, we can see that the coefficients of the external hire
16
dummy are positive but not significantly different from zero. In other words, internal and external CEOs are
not much different in terms of creating values for their firms. This finding is similar across the two outcome
variables that we use in our regression analysis.
However, when the external hire dummy variable enters the regression interacting with our proxies for the
importance of general skills, it shows a statistically significant effect on a firm’s abnormal performance and
the statistical fit of our empirical model, measured by adjusted R2 , also improves. The interaction term
coefficients (interaction between the external hire dummy and general skills proxies) measures, for a given
level of importance of general skills, the difference between the performance of firms with external CEOs and
those with internal CEOs. Thus, the positive and statistically significant coefficient shows evidence that with
the importance of general skills, the performance edge of firms with internal CEOs over firms with external
CEOs is decreasing. In other words, the general skills component of the overall CEO skills set contributes
more to the performance of a firm with an external CEO than a firm with an internal CEO, and the effect
is only identified when the CEO type is interacted with the prevalence of general purpose technology.
Furthermore, controlling for industry and year fixed effects ensures that the interaction term coefficients
are driven by the heterogeneity across firms in a given industry along the joint dimension of firm’s hiring
decision and the importance of general skills; this means that when general skills become more important,
the contribution of an external CEO relative to that of an internal CEO to firm performance also increases
monotonically. These findings are similar across the two outcome variables that we use in our regression
analysis.
Statistical significance does not necessarily imply economic significance in the effect of a firm’s hiring decision
and its interaction with general skills. To this end, we also estimate the economic significance of this
interaction effect. We find that, at the mean, with a 10% increase in the importance of general skills, the
difference between the performance of a firm with an external CEO and that with an internal CEO increases
by 0.9 to 1.2 percentage points (conditional on other exogenous variables evaluated at the mean).15 This
translates into a 15 to 20 percentage points increase in the post-turnover performance of an external CEO
firm compared to an internal CEO firm from a one standard deviation increase in computer stock per worker
(which is about $4,573). Similarly, a one standard deviation increase in computer investment per worker
(which is about $2,549), another proxy for the importance of general skills, increases the post-turnover
performance of an external CEO firm compared to an internal CEO firm by 16 to 22 percentage points.
15 The numbers are calculated using ∆y = β(∆x/x) where x is the interaction term between the importance of general skills
measure (in levels) and the external CEO hire dummy, y is the firm performance measure, and β is the estimated coefficient of
x in the regression.
17
Table 5 reports the regression results from the Turnover Sample using a broad measure of the prevalence of
general purpose technology within the industry, industry-level information technology intensity, as proxy for
the importance of general skills. Once again we focus our analysis on the interaction term, the interaction
between the external hire dummy and the information technology intensity measures. We find that, first,
the inclusion of the interaction term improves the empirical model fit and, second, the interaction term
coefficients are statistically as well as economically significant across the two outcome variables.
In short, the regression results presented above show that an external CEO compared to an internal CEO
does not have an independent effect on firm performance, but when it is interacted with the prevalent general
purpose technology, a proxy for the importance of general skills, external CEO relative to internal CEO does
have a positive effect on firm performance. Since general purpose technology can be put to the best possible
use with general skills, the interaction effects essentially identify the effects of the general skills components
of external CEOs, as opposed to internal CEOs, on firm performance via the channel of general purpose
technology.
Two caveats are in order. First, we focus only on the Turnover Sample here which may not be a random
sample in the sense that firms with CEO turnover may be systematically different from firms without CEO
turnover. Second, the decision to hire an external versus an internal CEO may itself be endogenous and
depends on unobservables not controlled for in our regression biasing the estimated interaction effects. We
deal with these two issues in the robustness checks.
6.3 Robustness Checks
6.3.1 Problem of Selection on Turnover
The Turnover Sample essentially tests for the difference in CAR2ijt in external versus internal CEO firms.
However, firms with turnover may be systematically different from those with no turnover, which implicates
the above empirical specifications with a possible sample selection bias. Thus, we also test the implication
of our economic framework using the whole sample, where we include all types of firm-CEO, i.e., incumbent,
internal, and external. We estimate the same regressions as in (3) and (4), except that when EXTijt = 0, it
actually includes both incumbent and internal CEOs, and we also include firm-CEO fixed effects instead of
industry fixed effects in the new set of regressions using the Whole Sample. We expect the coefficient of the
interaction term to be positive, i.e., β2 > 0.
18
Table 6 reports the results for the narrow measure of general purpose technology (industry-level comput-
erization) as proxy for the importance of general skills whereas Table 7 reports the results for the broader
general purpose technology measure (industry-level information technology intensity). The interpretation
of the interaction term coefficients are slightly different in these regressions with the Whole Sample. In
the previous cross sectional regressions of Turnover Sample the benchmark was the internal CEO firm in a
given industry (we have only industry and year fixed effects in (3) and (4)) where we identified the effect of
an external CEO’s general skills component on firm performance relative to the internal CEO firm via the
channel of general purpose technology.
In our regression with the Whole Sample, however, the benchmark is all firms with incumbent CEOs and
firms with internal CEOs in a given period; the interaction term captures the effect of the general skills
component of the external CEO relative to all other CEOs on firm performance via the channel of general
purpose technology. The inclusion of firm-CEO and year fixed effects in these regressions implies that
heterogeneity in CEO types within a firm mostly drives the regression coefficients. This means that when a
firm hires an external CEO given three competing alternatives (internal CEO, external CEO, incumbent),
the interaction term coefficient captures the differential effect of an external CEO over all other CEO types
on firm performance when general skills become more important.
[Tables 6 and 7 are about here]
Results in Tables 6 and 7 show that the interaction term coefficients are significant at the 1% to 5% level.
These are also economically significant and of similar magnitude as in the cross sectional regressions, so we
do not report the results here for the sake of brevity. Correcting for the selection on turnover by expanding
our sample substantially improves the model fit measured by adjusted R2 . Furthermore, the inclusion of
firm-CEO fixed effects allows us to control for the unobserved quality of a firm-CEO match. When the
quality of a firm-CEO match is controlled for, the interaction term can separate the effect of the general
skills of a CEO from other unobservables that affect the interaction term and firm performance.
6.3.2 Problem of Endogeneity of Hiring Decision
Another potential problem is selection bias in firm’s hiring decisions given that decisions by firms to hire
external CEOs versus internally promoting CEOs are not random. In other words, there may be some unob-
servables in the disturbance terms in (3) and (4) that are correlated with a firm’s decision to hire an external
CEO as opposed to promoting an internal employee to the CEO level. However, if the unobservables are also
correlated with the outcome variable, we in fact have an endogeneity problem that requires instrumental
19
variable estimation to correctly estimate our regression model. We assume that unobservables are correlated

with the hiring decision EXTijt but not with the outcome variable CAR2ijt . To this end, we use the
control function approach [Heckman and Robb (1985)] to correct for any potential endogeneity on firms’
CEO hiring decisions.
The essence of the control function approach is to proxy (or control for) the portion of the disturbance term
that is correlated with the hiring decision of the firm, i.e., EXTijt . Once the portion of the disturbance term
that is responsible for the correlation is expunged, the new error term is uncorrelated with EXTijt , and the

regression yields unbiased estimates of the impact of EXTijt and GP Tjt × EXTijt on firm performance
F IRM P ERijt . With the control function approach the data generating process is given by:

F IRM P ERijt = α + β. GP Tjt × EXTijt + γ.EXTijt + X 0 .δ + f Z + µj + νt + εijt (8)

where f Z is a function of observables Z, the set of characteristics that affect the hiring decisions of firms.

Under the assumption of selection on observables, conditioning on f Z results in a disturbance term, εijt ,
that is independent of EXTijt and hence, the estimates of the parameters of interest β and γ are unbiased.
The control function is constructed as follows. We first estimate the propensity score of the firm hiring an
external CEO. In particular, the propensity score is the predicted probability from the Probit regression
with EXTijt as the dependent variable on Z which includes the measures of general purpose technologies,
characteristics of the newly appointed CEO (age and whether the CEO has an MBA degree), and other
control variables (sales, firm performance, age of the departing CEO). Then we use a polynomial in the

estimated propensity score to flexibly model f Z :
n
X k
CAR2ijt = α + β. GP Tjt × EXTijt + γ.EXTijt + X 0 .δ + φk .p̂ Z + µj + νt + εijt . (9)
k=1
In the actual regressions, we use a 5-th degree polynomial of the propensity score as the control function.
Tables 8 and 9 present the regression results from the control function approach that correct for the selection
on the hiring decision of the firm. Cross-sectional regression models in (3) and (4) ameliorate in terms of
model fit under the control function approach, while the interaction term coefficients remain statistically
significant at the 5% to 1% level for both measures of general purpose technology. These are also economically
significant results similar to those in the baseline regression models, so for the sake of brevity we do not
report the results here. The Whole Sample regression models and the control function specifications together
imply that the estimated interaction term coefficients are robust to any type of sample selection as well as
20
potential endogeneity issues.
[Tables 8 and 9 are about here]
7 CEO General Skills, Firm Performance, and CEO Compensa-

tion
The central issue in the executive compensation literature is understanding what explains the meteoric rise
in executive compensation in recent times. In a performance-based compensation scheme, better firm perfor-
mance implies higher compensation for the CEO. Thus, when CEO general skills induce better performance
we should also see a rise in CEO compensation. We hypothesize that when CEO general skills lead to better
firm performance in a performance-based compensation structure superior performance should translate into
a higher CEO wage all else being equal.
We use a mediating instrument methodology [Baron and Kenny (1986); and Judd and Kenny (1981)] to test
this hypothesis.16 To implement the mediation process we estimate the following regression models:

0
CEOWAGEijt = α + β. GP Tjt × EXTijt + Xijt .δ + µj + νt + εijt (10)

CEOWAGEijt = α0 + β 0 . GP Tjt × EXTijt + γ 0 .F IRM P ERijt + Xijt
0
.δ 0 + µj + νt + εijt (11)
where CEOWAGEijt is the excess in CEO wage relative to the industry median for firm i in industry j,
F IRM P ERijt is firm performance measure defined earlier, and Xijt is the set of control variables. In these
models, β extimates the “total effect” of CEO general skills on CEOWAGEijt and β 0 estimates the “indirect
effect” of CEO general skills on CEOWAGEijt after F IRM P ERijt has been controlled for. From these

regression models, we calculate the reduction in the “total effect” as a result of mediation using β − β 0 and
bootstrap the reduction parameter to come up with confidence intervals. The design considerations of our
mediating instrument methodology weaken the plausibility of reverse mediation. That is, mediation from
the outcome variable to any of the explanatory variables does not make sense since in all regressions the
explanatory variables are measured temporally before the outcome variable.
Table 10 reports the mediating instrument regression results for the Whole Sample. It shows that both the
interaction term and the performance measure significantly (positively) affect CEO excess compensation.
However, the effect on the interaction term declines when firm performance is controlled for. To investigate
16 See the appendix for a discussion on the mediating instrument method and how we implement this for our empirical
estimation purpose.
21
whether the decline in the effect of the interaction term is statistically significant we bootstrap the reduction
parameters, and Figure 3 shows the results. Regardless of the proxy measure used for industry-level general
purpose technology and firm performance, the “total effect” of CEO general skills (interaction term) on
excess CEO compensation reduces 90% of the time in 1000 bootstrap replications.
[Table 10 and figure 3 are about here]
In short, the empirical exercise here indicates that the general component of the CEO skills affects firm
performance, and better firm performance in turn leads to higher CEO compensation. Through this channel,
CEO general skills can partly explain the trend in executive compensation witnessed over the last three
decades.
8 Conclusion
There is substantial disagreement on the merits as well as the causes of the large rise in executive compen-
sation. The deteriorating business climate in recent times has further fueled the debate of whether CEO
compensation can be justified. One view attributes the substantial rise in CEO compensation to a failure
in governance structure while another attributes it to the competition in the executive labor market. This
paper focused on the market-based theory of Murphy and Zábojnı́k (2007) and assessed empirically the
relationship between the CEO general skills and firm performance.
The skills of a CEO can be decomposed into two parts: firm-specific skills (CEO human capital specific to
the current firm) and general skills (CEO human capital transferable across firms). Murphy and Zábojnı́k
(2007) argue that when general skills become relatively more important (relative to firm-specific skills) in
the production and management process, firms are more likely to hire external CEOs. As firms compete
with each other in the executive labor market to get optimal firm-CEO matches, CEOs extract rents from
firms and, as a result, executive compensation increases. We extend Murphy and Zábojnı́k (2007) and show
that when general skills become more important, the excess in expected profits of an internal-CEO firm over
an external-CEO firm decreases. Thus, CEO skills are related to firm performance via the channel of the
importance of general skills.
We test the foregoing hypothesis by constructing proxies for the importance of general skills. We argue that
the prevalence of general purpose technology in an industry is a good indicator of the importance of general
skills in that industry. General purpose technologies shift the demarcation between general and specific skills
so that the prevalence of such technologies in an industry should indicate how important general skills are
22
in that industry. We use industry-level computerization and information technology capital as measures of
general purpose technologies and proxy the importance of general skills with these variables. We interact
the general skills proxies with the firm’s CEO hiring decision to identify the effect of a CEO’s general skills
on firm performance.
We find that trends in the executive compensation and external CEO hiring are significantly positively
correlated with the proxies for general skills. Moreover, we find that newly hired external CEOs in industries
relying more on general skills create greater shareholder value relative to the industry median than do newly
hired internal CEOs in similar industries. These differential effects on firm performance increase in favor of
external CEO-firms as general skills become more important in the industry. These findings are economically
significant and do not seem to be driven by sample selection and endogeneity problems.
Furthermore, we relate CEO skills to CEO compensation by showing that CEO general skills induce higher
firm performance leading in turn to higher greater CEO compensation. These results suggest that CEO skills
can significantly affect firm performance, and that the general skills of CEOs seem to be correctly priced
into CEO compensation contracts. An important question that remains to be explored concerns the welfare
implications of the effect of the importance of general skills on executive compensation. Another question
that remains to be addressed is, when only the general skills components of CEO skills are priced into the
compensation contract does this create a disincentive for CEOs to invest in firm-specific human capital in
effect hindering firm performance?
23
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25
Appendices
A Proof of Proposition 1
Assume that the internal candidate’s ability a follows a certain distribution with pdf φ(a) and a support [0, ā]

for some maximum ability level ā. Denote E π I and E π E as the expected profits of hiring an internal

CEO and an external CEO respectively, and ∆ = E π I − E π E . We want to show that ∂∆/∂γ < 0.
Ra
From (1) and (2), we can see that E π E = 0. On the other hand, E π I = aLH π(n, α, 1)φ(α)dα =
R aH
aL
f (n)α − wn − wM (α) φ(α)dα. Therefore, the difference in profits is
Z aH
f (n)α − wn − wM (α) φ(α)dα.

∆ = (12)
aL
By the Leibniz Integral Rule,17 we have:
Z aH (γ)
∂∆ ∂
f (n)α − wn − wM (α) φ(α)dα

=
∂γ ∂γ aL
Z aH (γ)
∂wM (α)

M
∂aH (γ)
= − φ(α)dα + f (n)aH (γ) − wn − w aH (γ) φ[aH (γ)] . (13)
aL ∂γ ∂γ
The first term in the last line above is negative because ∂wM (·)/∂γ > 0. For the second term, the expression
in the curly bracket is positive because we are integrating over the region [aL , aH ] in which the firm makes
a positive profit. Since ∂aH (γ)/∂γ < 0, the second term is negative. Thus, ∂∆/∂γ < 0.
Q.E.D.
B Mediating Instrument Methodology
In an effort to avert confounding in observational studies, economists and social scientists have devised
“Instrumental Variable (IV)” method which is based on a basic principle that the instrument must be
correlated with the explanatory variable while being uncorrelated with the outcome variable (dependent
variable). A mediating instrumental variable, on the contrary, is an auxiliary variable that fulfills radically
different conditions from those demanded by the traditional instrumental variable. A mediating instrument
17 The ∂
R b(α) R b(α) ∂f (x,α) ∂b(α) ∂a(α)
Leibniz Integral Rule says that: ∂α a(α)
f (x, α)dx = a(α) ∂α
dx + f b(α), α] ∂α − f a(α), α] ∂α .
26
must be correlated with both the explanatory variable and the outcome variable so that it can mediate the
causation from the explanatory to the outcome variable.
To explain the mediating instrument methodology, consider a variable X that is assumed to affect another
variable Y . The variable X is called the initial variable, and the variable that it causes, or Y , is called the
outcome variable. The effect of X on Y may be mediated by a process or mediating variable M , and the
variable X may still affect Y . Complete mediation is the case in which variable X no longer affects Y after
M has been controlled for, whereas partial mediation is the case in which the path from X to Y is reduced
in absolute size but is still different from zero when the mediator is controlled for. Note that a mediational
model is a causal model meaning that the mediator is presumed to cause the outcome and not vice versa. If
the presumed model is not correct, the results from the mediational analysis are of little value.
When the mediational model is correctly specified, Baron and Kenny (1986) and Judd and Kenny (1981)
outline four steps in establishing mediation: (i) the initial variable must be correlated with the outcome in
a regression model where Y is the criterion variable and X is a predictor establishing the fact that there
is an effect that may be mediated; (ii) the initial variable X must be correlated with the mediator M in a
regression model where M is the criterion variable and X is a predictor; (iii) the mediator M must affect
the outcome variable Y in a regression model where Y is the criterion variable and X and M are predictors;
(iv) to establish that M completely mediates the X → Y relationship, the effect of X on Y controlling for
M should be zero. The effects in both (iii) and (iv) are estimated in the same equation. It is not sufficient
just to correlate the mediator M with the outcome Y ; the mediator and the outcome may be correlated
because they are both caused by the initial variable X. Thus, the initial variable X must be controlled in
establishing the effect of the mediator M on the outcome variable Y .
27
Figure 1: Importance of General Skills and Firm Performance

This figure is adopted from Murphy and Zábojnı́k (2007). It shows the difference between the expected
profits of hiring an internal and an external CEO for a given level of general skills. When the importance of
general skills is γL , the difference between the expected profits of hiring an internal and an external CEO is
given by the area ABL CL . When the importance of general skills is γH , the difference between the expected
profits of hiring an internal and an external CEO is given by the area ABH CH . Together these imply that
when general skills become relatively important (γ increases), firms with an externally hired CEO perform
better than firms with an internally hired CEO in the sense that the area (ABL CL and ABH CH ) becomes
smaller as γ increases.
Wages
f (n∗ )γL a − wn∗
f (n∗ )γH a − wn∗

CL
CH
f (N )a − wN
A
w
BH BL
Managerial
aL (γL ) = aL (γH ) aH (γL ) aH (γH ) ability
Promotions for γH
Promotions for γL
28
Figure 2: Heterogeneity in Computerization Across Industries Over Various Sample Periods

This figure shows the level of computerization across various industries over four different sample years.
In the figure, the y-axis depicts the log of computer capital per worker in a given industry and the x-
axis represents the 2-digit Bureau of Economics Analysis (BEA) industry classifications. It shows that
computerization increases for all industries over the sample periods (dots lie higher on the y-axis over the
years). For example, in 1992 there are 4 industries with log (computer capital per worker) above the dotted
‘0’ line whereas in 1997 there are 7 industries above the ‘0’ line threshold. The figure also highlights that a
considerable amount of heterogeneity remains across industries within a particular year, that is, the dots do
not lie on a horizontal line.
1992 1997
4
4
Log(Comp. Stock Per-Worker)

2
2
0
0
-2
-2
-4
-4
0 20 40 60 80 0 20 40 60 80
2-Digit BEA Industry Class 2-Digit BEA Industry Class
2002 2006
4
4

2
2
0
0
-2
-2
-4
-4
0 20 40 60 80 0 20 40 60 80
2-Digit BEA Industry Class 2-Digit BEA Industry Class
29
Figure 3: Trends in Computerization, Executive Compensation, and External CEO Hiring

This graph shows the trends in industry-level computerization, executive compensation, and external CEO
hiring in the US To generate this figure, we calculate the average yearly level of computer capital stock and
flow, CEO wage (in thousands), and fraction of external CEOs over all CEOs hired in a given year across
all firms and industries. We then apply a Hodrick-Prescott filter to isolate the trend and the idiosyncratic
components of these yearly average series. The figure plots the trend components against year across all firms
and industries. In the left-hand y-axis, the figure depicts the trend in yearly average computer capital stock
and also the trend in yearly average computer investment and the right-hand y-axis shows the trend in yearly
average executive wage and fraction of external CEO hirings. The trend components are all significantly
correlated at 1% level.
Industry-Level Computerization
2500
6
H-P Filtered CEO Wage

4
2000
2
1500
0
1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005
Sample Year
Comp. Stock Per-Workker Comp. Investment Per-Worker

H-P Filtered CEO Wage
H-P Filtered External-CEO Hire

Industry-Level Computerization
.1 .15 .2 .25 .3
0 2 4 6
1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005
Sample Year
Comp. Stock Per-Workker Comp. Investment Per-Worker

H-P Filtered External-CEO Hire
30
Figure 4: CEO General Skills, Firm Performance, and CEO Compensation

This graph shows the bootstrap distribution of difference (β−β 0 ) in the “Total Effect” of CEO general skills on
CEO wage as a result of mediation through firm performance. The reduction parameter (β −β 0 ) is calculated
0
from the following two regression models: CEOWAGEijt = α+β.(GP Tjt ×EXTijt )+Xijt .δ+µj +νt +εijt and
CEOWAGEijt = α + β 0 .(GP Tjt × EXTijt ) + γ.F IRM P ERijt + Xijt 0
.δ + µj + νt + εijt , where CEOWAGEijt
is defined to be the excess CEO compensation (excluding stock options) relative to the median firm in the
2-digit BEA industry. In the figure, vertical axis denotes the probability with which mediation takes place,
that is (β − β 0 ) < 0, and the horizontal axis shows the change in the “Total Effect” of the interaction term
(general skills proxy). In the figure, (a) corresponds to Column 2 of Table 10, (b) corresponds to Column
5 of Table 10, (c) corresponds to Column 3 of Table 10, and (d) corresponds to Column 6 of Table 10. It
clearly shows that the “Total Effect” decreases (difference is negative) with 90% of the times in our 1000
bootstrap replications. In other words, CEO general skills translate into superior firm performance and
better performance in turn translates into better CEO pay.
(a) (b)
1
1
.4 .6 .8
.4 .6 .8
Fraction
Fraction
.2
.2
0
−.06 −.04 −.02 0 .02 −.04 −.02 0 .02

Difference Difference
(c) (d)
1
1
.4 .6 .8
.4 .6 .8
Fraction
Fraction
.2
.2
0
−.06 −.04 −.02 0 .02 −.06 −.04 −.02 0 .02

Difference Difference
31
Table 1: Summary Statistics: Firm and CEO variables
This table shows the summary statistics of the firm and the CEO variables for the Whole Sample (Panel A) and
Turnover Sample (Panel B). We use a market model to calculate normal stock returns (including dividends) for the
sample firms in any given period and then subtract the normal return from the realized firm stock return to calculate
abnormal return and cumulative the abnormal return over two years to calculate the cumulative abnormal return.
To calculate the industry-adjusted cumulative return, we subtract the median industry stock return from the realized
return of a firm in a given industry and in a given period and cumulate the industry-adjusted abnormal return over
two years. We define “Return on Assets” to be: N et Income/T otal Assets. “Corporate Governance Index” is from
Gompers, Ishii, and Metrick (2003). We define “Sales” to be the log of Net Sales of the firm in a given year normalized
by the industry median sales in that year. Among the CEO specific variables, “CEO Age” measures the age of the
CEO in calendar years and “CEO MBA” is a dummy variable indicating whether the CEO has a Master in Business
Administration degree or not.
N Mean Median Min Max S.D.

Panel A: Whole Sample
2-Year Cumulative Abnormal Return 4441 0.1120 0.0510 −1.1888 3.0854 0.4745
Ind. Adjusted 2-Year Cumulative Return 4441 0.1428 0.0396 −0.9341 4.0541 0.5601
External Hire Dummy 4441 0.0333 0.0000 0.0000 1.0000 0.1795
Corporate Governance Index 4441 9.5348 10.0000 1.0000 16.0000 2.6933
Sales 4441 −0.2146 −0.2038 −4.9417 3.8177 1.1575
Returns on Assets in Previous 2 Years 4441 0.0084 0.0025 −0.6093 0.3797 0.1070
CEO Age 4441 55.9068 56.0000 29.0000 81.0000 6.5746
CEO MBA 4441 0.3396 0.0000 0.0000 1.0000 0.4736
Panel B: Turnover Sample

2-Year Cumulative Abnormal Return 565 0.1008 0.0500 −1.1574 2.5530 0.5039
Ind. Adjusted 2-Year Cumulative Return 565 0.1196 0.0459 −0.9311 3.6431 0.5684
External Hire Dummy 565 0.2619 0.0000 0.0000 1.0000 0.4401
Corporate Governance Index 565 9.7646 10.0000 2.0000 16.0000 2.6167
Sales 565 −0.0162 −0.0296 −3.0248 3.6568 1.1379
Returns on Assets in Previous 2 Years 565 −0.0059 −0.0033 −0.5843 0.3754 0.1156
CEO Age 565 52.5965 53.0000 34.0000 74.0000 5.9763
CEO MBA 565 0.3947 0.0000 0.0000 1.0000 0.4892
32
Table 2: Summary Statistics: Difference in “Turnover” and “Non-turnover” Samples
This table shows the differences in means and medians between the observations in the Turnover Sample and those in
the Whole Sample but not in Turnover Sample (the “Non-turnover Sample”), i.e., the mean (median) of the variable
in the Turnover Sample minus that in the Non-turnover Sample. Column 2 reports the t statistic of the hypothesis
that the means are the same. Column 4 reports the χ2 statistic of the hypothesis that the medians are the same.
Since the external hire dummy is only defined for the Turnover Sample, the comparisons of means and medians are
not available. In the table, ∗ refers to significance at the 10% level, ∗∗ refers to significance at the 5% level and ∗∗∗
refers to significance at the 1% level.
(1) (2) (3) (4)

∆ in means t statistic ∆ in medians χ2 statistic
2-Year Cumulative Abnormal Return −0.0128 −0.5971 −0.0014 0.0167
Ind. Adjusted 2-Year Cumulative Return −0.0266 −1.0527 −0.0067 0.1030
External Hire Dummy . . . .
Corporate Governance Index 0.2633 2.1719∗∗ 1.0000 4.1534∗∗
Sales 0.2273 4.3714∗∗∗ 0.2048 15.3942∗∗∗
Returns on Assets in Previous 2 Years −0.0164 −3.4002∗∗∗ −0.0065 8.5344∗∗∗
CEO Age −3.7928 −13.0528∗∗∗ −4.0000 132.3214∗∗∗
CEO MBA 0.0632 2.9618∗∗∗ 0.0000 8.7725∗∗∗
Table 3: Industry-Level Computerization and Information Technology Endowments
This table shows the summary statistics of our primary proxies for the importance of general skills
at
the industry level. We define the “Computer Endowment” in the industry in a given year as:
Stock of Computer Equipments& Sof tware
T otal N umber of W orkers
. We define the “Speed of Computerization” in the industry in a given year

Investment in Computer Equipment& Sof tware
: T otal N umber of W orkers
, where the “Flow of Computer Assets” measures the additional (new)
investment in computers in a given period. The “Information Technology Endowment” is a broader measure of
computer and communication technologies prevailing in the industry in a given period. We construct the “Informa-
Stock of Computer and Communication Equipment& Sof tware
tion Technology Endowment” as: T otal N umber of W orkers
. Similarly, the “Speed of

Investment in Computer and Communication Equipment& Sof tware
Information Technology Adoption” is defined to be: T otal N umber of W orkers
.
For each industry, we calculate the stock measures for the same year, but while constructing the flow measures (ad-
ditional new investment) we lag by one year. Mean and medians of all our proxies of importance of general skills at
the industry level are significantly different from 0 at the 1% level. All numbers are in 1,000 constant dollars in year
2000. In the regressions, we use the log of these measures.
Mean Median Min Max S.D.

Computer Endowments 2.7092 0.8660 0.0379 28.7496 4.5726
Speed of Computerization 1.5303 0.4761 0.0226 16.0177 2.5487
Information Technology Endowments 17.6974 5.8518 0.2785 236.9892 38.2638
Speed of Information Technology Adoption 6.0852 2.3458 0.0961 64.8804 10.7010
33
Table 4: Regressions Analysis for Industry-Level Computerization Using the Turnover Sample
This table reports the regression results for the following models for the narrowmeasure of generalpurpose technologies: F IRM P ERijt = α̃+ β˜1 .GP Tjt +
0 0
β˜3 .EXTijt + Xijt .δ̃ + µj + νt + εijt and F IRM P ERijt = α + β1 .GP Tjt + β2 . GP Tjt × EXTijt + β3 .EXTijt + Xijt .δ + µj + νt + εijt , where i indexes
firm-CEO, j indexes industry, and t indexes time. GP Tjt is the importance of general skills in industry j, EXTijt is the external hiring dummy variable
for firm-CEO i, Xijt consists of the set of other control variables in the regression specifications, and µj and νt are industry and year fixed effects,
respectively. The dependent variables for Columns 1 through 4 are the 2-year cumulative abnormal return and the dependent variables for Columns 5
through 8 are the 2-year cumulative return minus the industry median. All the other explanatory variables are same as defined in previous tables. In
Aivazian, Lai, and Rahaman
all regressions, we winsorized the observations at the 1st and at the 99th percentile. We cluster the standard errors at the industry levels and report the
robust t-statistics in parentheses. In the table, (∗) refers to a 10% level of significance, (∗∗) refers to a 5% level of significance, (∗∗∗) refers to a 1% level
of significance, and (∗∗∗∗) refers to a 0.1% level of significance.
(1) (2) (3) (4) (5) (6) (7) (8)
2-Year Cumulative Abnormal Return Industry-Adjusted 2-Year Cumulative Return
Constant −0.4150 −0.0727 −0.2831 −0.2548 −0.1879 0.1937 −0.1236 −0.0883
(−0.9408) (−0.1708) (−1.4044) (−1.3001) (−0.4989) (0.5473) (−0.5946) (−0.4532)
Computer Endowments 0.1363 0.1040 0.1256 0.0839
(0.5268) (0.4150) (0.5921) (0.4435)
Computer Endowments × External Hire Dummy 0.0899∗∗ 0.1163∗∗∗∗
(2.3747) (4.1735)
34
Speed of Computerization 0.1110 0.0785 0.1770 0.1365
(0.6003) (0.4296) (1.2549) (1.0566)
Speed of Computerization × External Hire Dummy 0.0880∗∗ 0.1099∗∗∗
(2.4225) (3.9719)
External Hire Dummy 0.0264 0.0106 0.0251 0.0656∗ 0.0167 −0.0037 0.0148 0.0654∗∗
(0.6271) (0.2247) (0.6044) (1.9067) (0.3139) (−0.1119) (0.2811) (2.9276)
Corporate governance index −0.0080 −0.0072 −0.0079 −0.0071 −0.0079 −0.0069 −0.0077 −0.0068
(−0.6414) (−0.5879) (−0.6390) (−0.5866) (−0.6615) (−0.5942) (−0.6530) (−0.5892)
Sales −0.0535∗∗ −0.0559∗∗ −0.0531∗∗ −0.0557∗∗∗ −0.0529∗∗ −0.0559∗∗ −0.0522∗∗ −0.0555∗∗
(−2.8412) (−2.9259) (−2.9354) (−3.0318) (−2.7621) (−2.8315) (−2.8415) (−2.9200)
Past 2-Year Cumulative Return on Assets −0.4224 −0.4289 −0.4175 −0.4216 −0.1232 −0.1316 −0.1173 −0.1224
(−1.7065) (−1.7253) (−1.7009) (−1.7053) (−0.5334) (−0.5785) (−0.5002) (−0.5298)
CEO Age 0.0008 0.0005 0.0008 0.0005 −0.0014 −0.0018 −0.0013 −0.0017
(0.2246) (0.1412) (0.2221) (0.1318) (−0.5602) (−0.6969) (−0.5179) (−0.6589)
CEO MBA 0.0417 0.0431 0.0418 0.0429 0.0172 0.0190 0.0179 0.0192
(1.3071) (1.5014) (1.3290) (1.5196) (0.4347) (0.5440) (0.4677) (0.5723)
Industry Fixed Effects Y Y Y Y Y Y Y Y
Year Fixed Effects Y Y Y Y Y Y Y Y
Observations 565 565 565 565 565 565 565 565
CEO Skills and Firm Performance
R2 0.088 0.096 0.088 0.097 0.060 0.071 0.061 0.071

Table 5: Regression Analysis for Industry-Level Information Technology Endowments Using the Turnover Sample
This table reports the regression results for the following models for the broad
measure of generalpurpose technologies: F IRM P ERijt = α̃ + β˜1 .GP Tjt +
0 0
β˜3 .EXTijt + Xijt .δ̃ + µj + νt + εijt and F IRM P ERijt = α + β1 .GP Tjt + β2 . GP Tjt × EXTijt + β3 .EXTijt + Xijt .δ + µj + νt + εijt , where i indexes
firm-CEO, j indexes industry, and t indexes time. GP Tjt is the importance of general skills in industry j, EXTijt is the external hiring dummy variable
for firm-CEO i, Xijt consists of the set of other control variables in the regression specifications, and µj and νt are industry and year fixed effects,
respectively. The dependent variables for Columns 1 through 4 are the 2-year cumulative abnormal return and the dependent variables for Columns 5
through 8 are the 2-year cumulative return minus the industry median. All the other explanatory variables are same as defined in previous tables. In
all regressions, we winsorized the observations at the 1st and at the 99th percentile. We cluster the standard errors at the industry levels and report the
robust t-statistics in parentheses. In the table, (∗) refers to a 10% level of significance, (∗∗) refers to a 5% level of significance, (∗∗∗) refers to a 1% level
of significance, and (∗∗∗∗) refers to a 0.1% level of significance.
(1) (2) (3) (4) (5) (6) (7) (8)
2-Year Cumulative Abnormal Return Industry Adjusted 2-Year Cumulative Return
Constant 0.5156 0.3499 0.4308 0.4808 0.0483 −0.1632 −0.0521 0.0081
(0.8212) (0.5469) (0.8377) (0.9799) (0.0590) (−0.1960) (−0.0965) (0.0153)
Information Technology (IT) Endowments −0.1458 −0.1328 0.0036 0.0202
(−1.0316) (−0.9050) (0.0201) (0.1102)
IT Endowments × External Hire Dummy 0.0966∗∗ 0.1232∗∗∗∗
(2.7050) (4.5889)
35
Speed of IT Adoption −0.1906 −0.2449 0.0399 −0.0254
(−1.0085) (−1.3170) (0.1988) (−0.1221)
Speed of IT Adoption × External Hire Dummy 0.1101∗∗∗ 0.1325∗∗∗∗
(3.0437) (5.0688)
External Hire Dummy 0.0251 −0.1819∗ 0.0286 −0.1057 0.0165 −0.2477∗∗∗ 0.0159 −0.1457∗∗∗
(0.5994) (−1.8346) (0.6902) (−1.6050) (0.3128) (−3.8659) (0.3065) (−3.7315)
(−0.6580) (−0.5948) (−0.6584) (−0.5862) (−0.6595) (−0.5809) (−0.6645) (−0.5813)
Sales −0.0534∗∗ −0.0575∗∗ −0.0550∗∗ −0.0590∗∗ −0.0528∗∗ −0.0579∗∗ −0.0524∗∗ −0.0574∗∗
(−2.8720) (−2.8603) (−2.7922) (−2.7806) (−2.7806) (−2.7280) (−2.8976) (−2.7989)
Past 2-Year Cumulative Return on Assets −0.4236 −0.4325 −0.4202 −0.4307 −0.1205 −0.1317 −0.1204 −0.1331
(−1.7215) (−1.7466) (−1.7078) (−1.7363) (−0.5140) (−0.5730) (−0.5212) (−0.5896)
CEO Age 0.0004 0.0002 0.0006 0.0004 −0.0016 −0.0018 −0.0016 −0.0019
(0.1151) (0.0497) (0.1849) (0.1056) (−0.6699) (−0.7745) (−0.6476) (−0.7546)
CEO MBA 0.0407 0.0446 0.0423 0.0463 0.0165 0.0216 0.0163 0.0210
(1.2060) (1.5699) (1.2433) (1.6239) (0.4001) (0.6435) (0.3902) (0.6218)
Observations 565 565 565 565 565 565 565 565
R2 0.088 0.100 0.088 0.102 0.060 0.075 0.060 0.076

Table 6: Regression Analysis for Industry-Level Computer Endowments Using the Whole Sample
This table reports the regression results for the following models for the narrow measure of general purpose technologies to correct for the sample

0
selection on turnover: F IRM P ERijt = α̃ + β˜1 .GP Tjt + β˜3 .EXTijt + Xijt .δ̃ + θi + νt + εijt and F IRM P ERijt = α + β1 .GP Tjt + β2 . GP Tjt × EXTijt +
0
β3 .EXTijt + Xijt .δ + θi + νt + εijt , where for any given period t, CARijt) measures the cumulative abnormal return to the firm during the subsequent two
periods t + 1 and t + 1, GP Tjt is, same as before, the importance of general skills in industry j for firm i in period t, EXTijt is the external hiring dummy
variable which equals 1 if there is a turnover in period t by firm i and the new CEO is an external CEO, and Xijt consists of the set of other control
variables specific to the CEO of firm i and firm i itself, and and θi and νt are firm-CEO and year fixed effects, respectively. The dependent variables for
Columns 1 through 4 are the 2-year cumulative abnormal return and the dependent variables for Columns 5 through 8 are the 2-year cumulative return
minus the industry median. All the other explanatory variables are same as defined in previous tables. In all regressions, we winsorized the observations
at the 1st and at the 99th percentile. We cluster the standard errors at the industry levels and report the robust t-statistics in parentheses. In the table,
(∗)
refers to a 10% level of significance, (∗∗) refers to a 5% level of significance, (∗∗∗) refers to a 1% level of significance, and (∗∗∗∗) refers to a 0.1% level
of significance.
(1) (2) (3) (4) (5) (6) (7) (8)
Constant 1.3081∗∗∗ 1.3352∗∗∗ 1.4636∗∗∗ 1.4762∗∗∗ 1.4618∗∗ 1.4944∗∗ 1.6980∗∗ 1.7129∗∗
(3.6929) (3.6491) (3.2230) (3.1979) (2.5254) (2.5250) (2.2583) (2.2522)
Computer Endowments 0.4492∗∗∗ 0.4612∗∗∗ 0.5372∗∗∗ 0.5516∗∗∗
(3.5906) (3.6071) (3.6514) (3.6279)
36
Computer Endowments × External Hire Dummy 0.1199∗∗ 0.1440∗∗
(2.5476) (2.6776)
Speed of Computerization 0.3132∗∗∗ 0.3169∗∗∗ 0.3972∗∗∗ 0.4016∗∗∗
(3.7842) (3.8078) (3.4314) (3.4417)
(2.8431) (3.0633)
External Hire Dummy 0.1023 0.0998∗∗ 0.0999 0.1636∗∗∗ 0.0829 0.0799 0.0797 0.1546∗∗
(1.6084) (2.2797) (1.5923) (2.9770) (0.8539) (1.4572) (0.8343) (2.4266)
(−1.5618) (−1.5078) (−1.6663) (−1.6326) (−1.3776) (−1.3270) (−1.4711) (−1.4399)
Sales −0.2357∗∗∗∗ −0.2331∗∗∗∗ −0.2263∗∗∗∗ −0.2235∗∗∗∗ −0.2725∗∗∗∗ −0.2693∗∗∗∗ −0.2622∗∗∗∗ −0.2588∗∗∗∗
(−5.2286) (−5.2792) (−4.8795) (−4.8520) (−4.5551) (−4.5777) (−4.2908) (−4.2583)
Past 2-Year Cumulative Return on Assets −0.3934∗∗ −0.3885∗∗ −0.3912∗∗ −0.3869∗∗ −0.4112∗∗ −0.4053∗∗ −0.4055∗∗ −0.4004∗∗
(−2.2638) (−2.2120) (−2.2472) (−2.1931) (−2.6685) (−2.5895) (−2.6736) (−2.5882)
CEO Age −0.0131 −0.0136 −0.0123 −0.0126 −0.0140 −0.0147 −0.0134 −0.0137
(−1.4016) (−1.4274) (−1.1919) (−1.2040) (−1.0083) (−1.0383) (−0.8512) (−0.8635)
CEO MBA 0.0000 0.0000 0.0000 0.0000 0.0000 0.0000 0.0000 0.0000
. . . . . . . .
CEO-firm Fixed Effects Y Y Y Y Y Y Y Y
Observations 4441 4441 4441 4441 4441 4441 4441 4441

R2 0.400 0.401 0.399 0.400 0.384 0.385 0.383 0.384
Table 7: Regression Analysis for Industry-Level Information Technology Endowments Using the Whole Sample
This table reports the regression results for the following models for the broad measure of general purpose technologies to correct for
the sample selection

0
on turnover: F IRM P ERijt = α̃ + β˜1 .GP Tjt + β˜3 .EXTijt + Xijt .δ̃ + θi + νt + εijt and F IRM P ERijt = α + β1 .GP Tjt + β2 . GP Tjt × EXTijt +
0
β3 .EXTijt + Xijt .δ + θi + νt + εijt , where for any given period t, F IRM P ERijt measures the cumulative abnormal return to the firm during the
subsequent two periods t + 1 and t + 2, GP Tjt is, same as before, the importance of general skills in industry j for firm i in period t, EXTijt is the
external hiring dummy variable which equals 1 if there is a turnover in period t by firm i and the new CEO is an external CEO, and Xijt consists of
the set of other control variables specific to the CEO of firm i and firm i itself, and and θi and νt are firm-CEO and year fixed effects, respectively. The
dependent variables for Columns 1 through 4 are the 2-year cumulative abnormal return and the dependent variables for Columns 5 through 8 are the
2-year cumulative return minus the industry median. All the other explanatory variables are same as defined in previous tables. In all regressions, we
winsorized the observations at the 1st and at the 99th percentile. We cluster the standard errors at the industry levels and report the robust t-statistics
in parentheses. In the table, (∗) refers to a 10% level of significance, (∗∗) refers to a 5% level of significance, (∗∗∗) refers to a 1% level of significance, and
(∗∗∗∗)
refers to a 0.1% level of significance.
(1) (2) (3) (4) (5) (6) (7) (8)
Constant 0.6534 0.6584 0.7910∗ 0.7755∗ 0.6972 0.7035 0.8436 0.8249
(1.2568) (1.2580) (1.8453) (1.8105) (0.8934) (0.8888) (1.4051) (1.3588)
Information Technology (IT) Endowments 0.1089 0.0989 0.1131 0.1005
(0.7756) (0.6956) (0.6310) (0.5519)
37
IT Endowments × External Hire Dummy 0.1036∗∗∗∗ 0.1305∗∗∗∗
(5.2053) (5.0952)
Speed of IT Adoption 0.0341 0.0237 0.0411 0.0286
(0.3322) (0.2234) (0.3513) (0.2347)
Speed of IT Adoption × External Hire Dummy 0.1130∗∗∗∗ 0.1359∗∗∗∗
(5.8473) (4.5613)
External Hire Dummy 0.1048 −0.1103∗ 0.1034 −0.0285 0.0857 −0.1852∗∗ 0.0843 −0.0745
(1.6689) (−2.0793) (1.6076) (−0.7961) (0.8900) (−2.4004) (0.8635) (−1.2134)
Corporate governance index −0.0295∗ −0.0288 −0.0298∗ −0.0290 −0.0330 −0.0321 −0.0333 −0.0324
(−1.7798) (−1.7481) (−1.7941) (−1.7591) (−1.5942) (−1.5575) (−1.6032) (−1.5655)
Sales −0.2133∗∗∗∗ −0.2097∗∗∗ −0.2127∗∗∗∗ −0.2093∗∗∗ −0.2459∗∗∗ −0.2413∗∗∗ −0.2450∗∗∗ −0.2409∗∗∗
(−4.2031) (−4.0983) (−4.2048) (−4.1020) (−3.7052) (−3.6100) (−3.6927) (−3.5995)
Past 2-Year Cumulative Return on Assets −0.4293∗∗ −0.4244∗∗ −0.4333∗∗ −0.4288∗∗ −0.4550∗∗ −0.4487∗∗ −0.4589∗∗ −0.4536∗∗
(−2.3150) (−2.2813) (−2.2909) (−2.2493) (−2.6876) (−2.6453) (−2.6460) (−2.5897)
CEO Age −0.0093 −0.0092 −0.0090 −0.0087 −0.0094 −0.0092 −0.0091 −0.0087
(−1.0386) (−1.0214) (−0.9139) (−0.8829) (−0.6998) (−0.6835) (−0.6708) (−0.6400)
CEO MBA 0.0000 0.0000 0.0000 0.0000 0.0000 0.0000 0.0000 0.0000
. . . . . . . .
Observations 4441 4441 4441 4441 4441 4441 4441 4441

R2 0.395 0.396 0.395 0.396 0.378 0.379 0.378 0.379
Table 8: Regression Analysis for Industry-Level Computer Endowments Using Control Function Approach
This table reports the regression results for the following models for the narrow measure of general purpose technologies to correct for the sample selection
P k
on firm CEO hiring decision using control function approach: F IRM P ERijt = α+β. GP Tjt ×EXTijt +γ.EXTijt +X 0 .δ+ n k=1 φk .p̂ X +µj +νt +εijt ,
where i indexes firm-CEO, j indexes industry, and t indexes time. GP Tjt is the importance of general skills in industry j, EXTijt is the external hiring
dummy variable for firm-CEO i, Xijt consists of the set of other control variables in the regression specifications, and µj and νt are industry and year
Pn k
fixed effects, respectively. p̂ X is the propensity score of hiring an external CEO estimated from a probit regression and k=1 φk .p̂ X are nth

order polynomials of the propensity score p̂ X . The dependent variables for Columns 1 through 4 are the 2-year cumulative abnormal return and the
dependent variables for Columns 5 through 8 are the 2-year cumulative return minus the industry median. All the other explanatory variables are same
as defined in previous tables. In all regressions, we winsorized the observations at the 1st and at the 99th percentile. We cluster the standard errors
at the industry levels and report the robust t-statistics in parentheses. In the table, (∗) refers to a 10% level of significance, (∗∗) refers to a 5% level of
significance, (∗∗∗) refers to a 1% level of significance, and (∗∗∗∗) refers to a 0.1% level of significance.
(1) (2) (3) (4) (5) (6) (7) (8)

2-year cumulative abnormal return Industry-adjusted 2-year cumulative return
Constant 0.0707 −0.0033 −0.2043 −0.3117 0.3874 0.3018 0.2878 0.1647
(0.0915) (−0.0049) (−0.2592) (−0.4506) (0.4727) (0.4542) (0.3529) (0.2438)
Computer Endowments 0.0545 0.0206 0.0275 −0.0117
(0.2429) (0.1044) (0.1083) (−0.0558)
38
Computer Endowments × External Hire Dummy 0.1131∗∗ 0.1308∗∗∗
(2.7613) (3.3523)
Speed of Computerization −0.0265 −0.0617 −0.0036 −0.0439
(−0.1611) (−0.4322) (−0.0194) (−0.2880)
(2.8402) (3.3000)
External Hire Dummy 0.0627 0.0406 0.0625 0.1116∗ 0.0871 0.0615 0.0869 0.1431∗∗
(1.1967) (0.5641) (1.1821) (1.9638) (1.7450) (1.0537) (1.6886) (3.1245)
Corporate governance index −0.0013 −0.0005 −0.0016 −0.0008 −0.0005 0.0005 −0.0006 0.0003
(−0.0954) (−0.0348) (−0.1111) (−0.0538) (−0.0337) (0.0296) (−0.0386) (0.0201)
Sales −0.0121 −0.0150 −0.0117 −0.0149 −0.0119 −0.0153 −0.0117 −0.0154
(−0.6681) (−0.8340) (−0.6670) (−0.8593) (−0.6505) (−0.8936) (−0.6634) (−0.9366)
Past 2-Year Cumulative Return on Assets −0.1866 −0.1577 −0.1820 −0.1488 0.1096 0.1430 0.1116 0.1497
(−1.3985) (−1.1698) (−1.3246) (−1.0654) (0.4274) (0.5166) (0.4260) (0.5283)
CEO Age 0.0003 −0.0000 0.0003 −0.0001 −0.0006 −0.0010 −0.0006 −0.0011
(0.1082) (−0.0114) (0.0862) (−0.0310) (−0.2551) (−0.4382) (−0.2706) (−0.4449)
CEO MBA 0.0195 0.0247 0.0186 0.0236 0.0143 0.0203 0.0140 0.0197
(0.5613) (0.9051) (0.5257) (0.8517) (0.2995) (0.5142) (0.2923) (0.4997)

Observations 475 475 475 475 475 475 475 475
R2 0.063 0.078 0.063 0.078 0.051 0.068 0.051 0.068
Table 9: Regression Analysis for Industry-Level Information Technology Endowments Using Control Function Approach
This table reports the regression results for the following models for the broad measure of general purpose technologies to correct for the sample selection on
P k
firm CEO hiring decision using control function approach: F IRM P ERijt = α+β. GP Tjt ×EXTijt +γ.EXTijt +X 0 .δ + n k=1 φk .p̂ X +µj +νt +εijt ,
where i indexes firm-CEO, j indexes industry, and t indexes time. GP Tjt is the importance of general skills in industry j, EXTijt is the external hiring
dummy variable for firm-CEO i, Xijt consists of the set of other control variables in the regression specifications, and µj and νt are industry and year
Pn k
fixed effects, respectively. p̂ X is the propensity score of hiring an external CEO estimated from a probit regression and k=1 φk .p̂ X are nth

order polynomials of the propensity score p̂ X . The dependent variables for Columns 1 through 4 are the 2-year cumulative abnormal return and the
dependent variables for Columns 5 through 8 are the 2-year cumulative return minus the industry median. All the other explanatory variables are same
as defined in previous tables. In all regressions, we winsorized the observations at the 1st and at the 99th percentile. We cluster the standard errors
at the industry levels and report the robust t-statistics in parentheses. In the table, (∗) refers to a 10% level of significance, (∗∗) refers to a 5% level of
significance, (∗∗∗) refers to a 1% level of significance, and (∗∗∗∗) refers to a 0.1% level of significance.
(1) (2) (3) (4) (5) (6) (7) (8)

2-year cumulative abnormal return Industry-adjusted 2-year cumulative return
Constant −0.3286 −0.2689 −0.6006 −0.7218 0.2512 0.3230 0.1108 −0.0277
(−0.7512) (−0.6477) (−1.1230) (−1.3978) (0.6691) (0.9272) (0.1809) (−0.0463)
Information Technology (IT) Endowments −0.2117 −0.1838 −0.0468 −0.0133
(−1.1444) (−0.9864) (−0.2316) (−0.0658)
39
IT Endowments × External Hire Dummy 0.1155∗∗ 0.1389∗∗∗
(2.7766) (4.0541)
Speed of IT Adoption −0.2051∗ −0.2657∗∗ −0.0781 −0.1474
(−2.1122) (−2.6325) (−0.4654) (−0.8503)
Speed of IT Adoption × External Hire Dummy 0.1328∗∗∗ 0.1518∗∗∗∗
(3.3306) (4.7137)
External Hire Dummy 0.0624 −0.1891 0.0655 −0.1007 0.0869 −0.2155∗ 0.0881 −0.1018
(1.1880) (−1.5000) (1.2814) (−1.1458) (1.7083) (−1.9880) (1.7898) (−1.3308)
Corporate governance index −0.0018 −0.0006 −0.0020 −0.0008 −0.0007 0.0008 −0.0008 0.0007
(−0.1278) (−0.0422) (−0.1432) (−0.0516) (−0.0426) (0.0509) (−0.0526) (0.0436)
Sales −0.0121 −0.0174 −0.0128 −0.0177 −0.0118 −0.0182 −0.0121 −0.0177
(−0.7015) (−0.9088) (−0.7132) (−0.9026) (−0.6870) (−1.0200) (−0.7071) (−1.0373)
Past 2-Year Cumulative Return on Assets −0.1916 −0.1475 −0.1866 −0.1377 0.1096 0.1625 0.1101 0.1660
(−1.3457) (−1.0166) (−1.3578) (−0.9899) (0.4072) (0.5520) (0.4174) (0.5735)
CEO Age −0.0000 −0.0002 0.0004 0.0002 −0.0007 −0.0009 −0.0006 −0.0008
(−0.0044) (−0.0454) (0.1154) (0.0568) (−0.3047) (−0.3730) (−0.2531) (−0.3285)
CEO MBA 0.0186 0.0300 0.0189 0.0304 0.0140 0.0277 0.0141 0.0272
(0.5216) (1.2409) (0.5351) (1.3255) (0.2929) (0.8320) (0.2958) (0.8359)

Observations 475 475 475 475 475 475 475 475
R2 0.063 0.083 0.064 0.088 0.051 0.074 0.052 0.076
View publication stats
Table 10: CEO General Skills, Firm Performance and CEO Wage
This table reports the estimates from a mediating instrument methodology to determine how firm performance mediates the effect of CEO general
skills on CEO wage. The mediating instrument
methodology is explained in details in the
appendix. It reports
the results from regression model
0 0 0
CEOWAGEijt = α+β. GP Tjt ×EXTijt +Xijt .δ+µj +νt +εijt and CEOWAGEijt = α+β . GP Tjt ×EXTijt +γ.F IRM P ERijt +Xijt .δ+µj +νt +εijt .
CEOWAGEijt is defined to be the excess CEO compensation (excluding stock option) relative to the median firm in the 2-digit BEA industry. Results
show that the effect of the interaction term (CEO general skills proxy) decreases in absolute value when firm performance has been controlled for. In
other words, the results here indicate that skills affect performance, and better performance in turn leads to a higher CEO wage. Through this channel
of firm performance CEO general skills are channeled into higher CEO pay. We cluster the standard errors at the industry levels and report the robust
t-statistics in parentheses. In the table, (∗) refers to a 10% level of significance, (∗∗) refers to a 5% level of significance, (∗∗∗) refers to a 1% level of
significance, and (∗∗∗∗) refers to a 0.1% level of significance.
(1) (2) (3) (4) (5) (6)

Constant −3.6522 −3.7892 −3.7892 −3.4450 −3.5959 −3.6009
(−0.8792) (−0.9070) (−0.9089) (−0.8279) (−0.8585) (−0.8621)
Computer Endowments 0.1420 0.0938 0.0912
(0.9972) (0.6770) (0.6740)
Computer Endowments × External Hire Dummy 0.1260∗∗ 0.1142∗∗ 0.1133∗∗
(2.7577) (2.4252) (2.3514)
Speed of Computerization 0.1746∗∗ 0.1413∗ 0.1376∗
40
(2.2848) (1.8337) (1.8656)
Speed of Computerization × External Hire Dummy 0.1064∗∗ 0.0963∗∗ 0.0957∗∗
(2.8175) (2.4394) (2.3703)
2-Year Cumulative Abnormal Return 0.0981∗∗∗ 0.0968∗∗∗
(3.2558) (3.2479)
Industry Adjusted 2-Year Cumulative Return 0.0883∗∗∗ 0.0872∗∗∗
(3.3538) (3.3339)
External Hire Dummy −0.0731 −0.0829 −0.0801 −0.0072 −0.0229 −0.0206
(−1.2015) (−1.3424) (−1.3105) (−0.1290) (−0.4004) (−0.3689)
Corporate governance index −0.0038 −0.0011 −0.0011 −0.0041 −0.0012 −0.0012
(−0.4131) (−0.1541) (−0.1520) (−0.4476) (−0.1763) (−0.1737)
Sales 0.0817∗ 0.1039∗∗ 0.1048∗∗ 0.0815∗∗ 0.1025∗∗ 0.1035∗∗
(2.1260) (2.5254) (2.5606) (2.3578) (2.6964) (2.7272)
Past 2-Year Cumulative Return on Assets 0.4038∗ 0.4392∗∗ 0.4355∗∗ 0.4145∗ 0.4494∗∗ 0.4454∗∗
(1.9666) (2.3077) (2.3047) (2.0547) (2.4023) (2.3946)
CEO Age 0.0724 0.0738 0.0737 0.0719 0.0732 0.0731
(0.8870) (0.8959) (0.8963) (0.8813) (0.8885) (0.8893)
CEO MBA 0.0000 0.0000 0.0000 0.0000 0.0000 0.0000
. . . . . .

Observations 4391 4391 4391 4391 4391 4391
R2 0.730 0.732 0.732 0.731 0.732 0.732

CEO General Skills and Firm Performance What Does

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Varouj Aivazian Mohammad Rahaman

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Varouj Aivazian Tat-kei Lai Mohammad Rahaman∗

July 10, 2009

JEL Classification: G30, J40

2 General Purpose Technologies and Managerial Skills

3 A Simple Economic Model

π(n, a, s) = f (n)sa − wn − wM (a) (1)

basically the same.

important general skills are.

[Figure 1 is about here]

We estimate the following two linear models:

F IRM P ERijt = α̃ + β˜1 .GP Tjt + β˜3 .EXTijt + Xijt

5 Data and Variables

5.1 Sample Construction

5.2 Variable Construction

5.2.1 External CEO Hire Dummy

joined the firm” variables in ExecuComp.

5.2.2 Firm Performance Measure

Then the industry-adjusted cumulative return IACR2ijt is defined as:

IACR2ijt = CR2ijt − CR2

5.2.3 Importance of General Skills

 Stock of Computer Equipment & Sof tware 

5.2.4 Other Control Variables

Industry-adjusted returns on firm’s assets We use industry-adjusted returns on a firm’s assets to

5.3 Summary Statistics

[Table 1 is about here]

[Table 2 is about here]

[Table 3 is about here]

6.1 Univariate Analysis

where Xt is the actual series and X

[Figure 2 is about here]

6.2 Regression Results

[Table 4 is about here]

[Table 5 is about here]

6.3 Robustness Checks

6.3.1 Problem of Selection on Turnover

[Tables 6 and 7 are about here]

6.3.2 Problem of Endogeneity of Hiring Decision

potential endogeneity issues.

[Tables 8 and 9 are about here]

7 CEO General Skills, Firm Performance, and CEO Compensa-

[Table 10 and figure 3 are about here]

[5] Bresnahan, T. F. (1999), “Computerisation and Wage Dispersion: An Analytical Reinterpretation,”

By the Leibniz Integral Rule,17 we have:

B Mediating Instrument Methodology

Figure 1: Importance of General Skills and Firm Performance

f (n∗ )γH a − wn∗

Figure 2: Heterogeneity in Computerization Across Industries Over Various Sample Periods

Log(Comp. Stock Per-Worker)

Log(Comp. Stock Per-Worker)

Figure 3: Trends in Computerization, Executive Compensation, and External CEO Hiring

H-P Filtered CEO Wage

Comp. Stock Per-Workker Comp. Investment Per-Worker

H-P Filtered External-CEO Hire

Comp. Stock Per-Workker Comp. Investment Per-Worker

Figure 4: CEO General Skills, Firm Performance, and CEO Compensation

−.06 −.04 −.02 0 .02 −.04 −.02 0 .02

−.06 −.04 −.02 0 .02 −.06 −.04 −.02 0 .02

Table 1: Summary Statistics: Firm and CEO variables

N Mean Median Min Max S.D.

Stock of Computer Equipment & Sof tware