“Chief executive officers have less influence on company performance than is commonly assumed.”

Previous studies wrongly attribute the performance effect of randomness—of chance—to the CEO. When accounting for random fluctuations, the true performance effect of CEO leadership is much smaller than previously thought, with over 70 percent of the previously measured 'CEO effect' potentially being due to chance.

This paper investigates whether and how individual managers affect corporate behavior and performance. We find that manager fixed effects matter for a wide range of corporate decisions, explaining a significant extent of the heterogeneity in investment, financial, and organizational practices of firms.

If more realistic assumptions of how chance can affect firm performance are made, the effect of CEO leadership is almost indistinguishable from the effect of chance, independent of the estimation methodology.

Using refined variance-partitioning methods on a twenty-year sample, we find that the individual CEO accounts for roughly a third of the variance in firm profitability, a far larger effect than earlier techniques had detected.

Employing variance partitioning methodologies on data spanning 60 years and more than 18,000 firm-years, we find that the proportion of variance in performance explained by individual CEOs, or 'the CEO effect,' increased substantially over the decades of study.

We suggest that the empirical methodology employed by Fitza to support his claims substantially overstates the 'random chance' element of the CEO effect. We replicate the findings and suggest that the CEO effect is significant and much larger than chance.

While the evidence supports the notion that CEOs matter for firm performance, it also suggests that this effect runs through the appropriate matching of CEOs to firms—that is, differentiation among CEOs is largely horizontal rather than vertical. There isn't one optimal way to be a CEO.

Firms led by leader-type CEOs have significantly higher labor productivity and profits. A one standard deviation increase in the CEO behavior index is associated with a 7% increase in firm sales, but leader behavior is not universally optimal—some firms perform best with manager-type CEOs.

While CEO effect scholars agree that variation in firm performance tends to persist over time and that CEOs' performance contribution should be gauged against a changing context, recent CEO effect studies addressing these issues have made extreme but opposite claims concerning the magnitude of the CEO effect. We show why recent findings that indicate a much larger CEO effect are spurious. Our empirical result shows that the opposite claim positing that the CEO effect is nearly indistinguishable from chance is likewise unwarranted.

Firms that hire leader-type CEOs perform better, and it takes three years for a new CEO to make a difference. Structural estimates indicate that productivity differentials are due to mismatches rather than leaders being better for all firms. The model estimation is consistent with horizontal differentiation of CEOs with matching frictions: while most firms with managers are as productive as those with leaders, the supply of managers outstrips demand such that 17 percent of firms end up with the 'wrong' type of CEO.

While the evidence supports the notion that CEOs matter for firm performance, it also suggests that this effect runs through the appropriate matching of CEOs to firms — that is, differentiation among CEOs is largely horizontal rather than vertical. There isn't one universally optimal way to be a CEO; rather, performance depends heavily on the fit between the CEO's style and the specific needs of the firm.

Tosi et al. (2000) conducted a meta-analysis of determinants of CEO pay, finding that 40% of the variance in total CEO pay is attributable to firm size, while (past) firm performance accounts for less than 5%. Bonuses, the most commonly studied incentive, had a small positive effect on next year's accounting performance metric Return on Assets (ROA, 0.046).

In response to our first research question (is there an overall relationship between CEO overconfidence and firm performance?), our finding demonstrates that CEO overconfidence has a weak, yet statistically significant, positive relationship with firm performance. This result provides some meta-analytic support for upper echelons theory.

Previous empirical efforts to examine the link between CEOs and firm performance using variance decomposition, while provocative, nevertheless suffer from methodological problems that systematically understate the relative impact of CEOs on firm performance compared to industry and firm effects. The results of this study suggest that in certain settings the 'CEO effect' on corporate-parent performance is substantially more important than that of industry and firm effects.

To isolate the 'CEO effect', researchers examined the impact of CEO hospitalisations on firm performance. They found that five-to-seven day hospitalisations sent firm profitability tumbling by 7% in the year of illness, providing causal evidence that CEOs are extremely important for ongoing operations.

This meta-analysis reviews the variance decomposition literature to evaluate the relative importance of industry, corporate parent, and business unit effects on firm performance, contextualizing the debate on how much individual leadership versus structural constraints drive outcomes.

This classic study by Lieberson and O'Connor is a cornerstone for those arguing that the top leadership position of an organization is relatively unimportant, showing that industry and company environmental variables account for far more variance in performance than leadership.

Empirical research from the US suggests that perhaps 20% to 38% of performance variation at the firm level can be attributed to CEOs' decisions. However, external factors beyond the CEO and the organization itself—such as industry conditions, economic shifts, and general business unpredictability—clearly matter quite a bit more than the CEO.

The study explores whether top executives matter, noting controversy in organizational literature. It finds that stock returns are more variable for firms run by powerful CEOs who hold significant decision-making power over the board, suggesting that executive characteristics interact heavily with organizational variables to shape performance.

A study by Arturo Bris of Yale University and Maryam Zargari of the IMD World Competitiveness Centre, entitled 'A Bullshit Job? A Global Study on the Value of CEOs', concludes that CEOs explain only around 2% of variability in stock returns. In contrast, global, country, and industry changes explain impacts of 11%, 4%, and 1% on stock returns, suggesting that a CEO's impact on a company may be less than external factors.

They find that CEO behavior is predictive of firm performance—but that the match between CEO type and firm needs is what ultimately drives outcomes. Rather than assuming there is a single 'best' CEO type, the paper emphasizes that effective leadership is context-dependent.

Research by Markus Fitza using variance decomposition on simulated and real firm data showed that over 70 percent of the 'CEO effect' measured by past studies could be due to chance. The findings suggest that previous studies tend to wrongfully attribute the effect of random fluctuations to CEOs, meaning the actual performance effect of CEO leadership is much smaller than previously thought.

Research in the Strategic Management Journal demonstrates that over time, CEOs have grown in their ability to influence their firm's performance. The aggregate CEO effect is shown to increase from approximately 8 percent of variance in 1969 to close to 20 percent by 2009, while the influences of industry and firm characteristics have decreased.

Research by Timothy Quigley, Francesco Chirico, and Massimo Baù comparing public and private firms found that 23.8% of performance variance in private firms could be attributed to the CEO, compared to just 16.6% in public firms. This indicates that public firms limit CEO discretion through larger boards, formalized governance, and shareholder oversight, reducing their overall impact.

In the early 2000s, researchers started reporting the effect of CEOs on profitability and return on assets (ROA), with estimates ranging from 15% of the total variance in profitability to 29% of the variance in ROA. Even with a conservative estimate of 10% to 20%, this is a significant impact CEOs have on their company's financial returns.