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

Abstract

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

Managerial Ability and Credit Ratings

“…We conclude that managerial ability matters more as firms approach financial distress and that distressed firms with high‐ability management obtain better credit ratings than distressed firms with less capable managers. This conclusion is consistent with results provided by Leverty and Grace () indicating that managerial ability is inversely related to the amount of time distressed firms spend in financial distress as well as the likelihood and cost of failure.…”

Quantifying the Managerial Ability of Microfinance Institutions: Evidence from Latin America

“…First, this study provides the pairwise correlation of managerial ability with other alternative measures. Second, the study uses the manager fixed effects (FEs) similar to Demerjian et al () and Leverty and Grace () to investigate whether the estimated managerial ability is statistically significant and attributed more to a manager of MFI. Finally, this research finds out the relationship between managerial ability and firm performance.…”

Bank Liquidity Creation and Risk‐Taking: Does Managerial Ability Matter?

“…For a long time, managerial ability, being latent, has been a very challenging concept to operationalize empirically. Thus the focus of prior literature has been first on CEO fixed effects (Bertrand and Schoar, ), second on CEO press visibility (Francis et al., ), and third on firm performance (Barr et al., ; Barr and Siems, ; Leverty and Grace, ). Constructing CEO fixed effects requires firm and manager observations over time.…”