CEO Tenure and Abnormal Returns

Given that CEO tenure is considered an impetus to firm performance, we analyze the abnormal returns for different tenure groups using the Fama-French (1993) and Carhart (1997) four-factor model. The empirical result shows that firm performance is positively related to CEO tenure. However, the relation is not linear. CEOs with tenure group of 7 to 10 years have the highest alpha and the abnormal return of tenure above 10 years is slightly smaller. Furthermore, portfolios constructed by tenure group suggest that it is practical to generate abnormal returns by taking a long position at firms with long-tenured CEOs and a short position at firms with short-tenured CEOs. The long-short strategy also implies that tenure has a greater effect on firm performance in small firms compared to large firms.