How Much do Managers Matter? Exploring The Influence of Manager-Firm Complementarities on Firm Performance

Abstract

Understanding how much influence managers have over firm performance has been one of the central questions in strategic management during the last five decades. Despite sustained scholarly interest in this question, the results of the empirical studies have been inconsistent and increasingly divergent. While some studies have suggested that managers dominantly shape firm-level outcomes, others have supported the notion that managers are entirely interchangeable and hold very little influence. In this paper, we suggest that the current theorizing on this question has failed to consider the role of complementarities – or fit – between managers and firms in determining firm performance. To illuminate the role of complementarities as a source of variation in firm performance, we combine a proprietary dataset containing information on top management teams for every company in the Compustat sample with a novel Grouped Fixed-Effects estimator while allowing for two-sided unobserved heterogeneity and endogenous manager mobility. Furthermore, we explore the role of labor market frictions and sorting in explaining the sources of firm performance heterogeneity over time using counterfactual models. Our findings have implications for the Upper Echelons and agency theories while advancing our understanding of the critical factors that shape firm performance.