Measuring CEO Talent and Its Impact on Firm Performance: A Theoretical Integration and Empirical Analysis

This paper analyzes whether CEOs who are good contrarian investors, good forecasters, or good market timers can run their firms better. Besides using the timing measure which combines returns before and after the trade, we also use the past return measure to estimate the contrarian aspect of CEO trades and the future return measure to assess CEO’s ability to forecast stock returns. Our results suggest that CEOs’ managerial talent and valuation ability are primarily related to CEOs’ past return measure, while high post-trade returns indicate the expropriation motive for CEO trades. Overall, we obtain strong evidence to support the idea that CEOs who are good contrarian investors tend to run their firms better on average than other CEOs.