In Sickness and in Health: Firm Performance and Managerial Health

Abstract

This paper examines the importance of CEO characteristics for firm valuation and policies using the insight that managerial effort depends in part on the health of the manager and health is part of human capital. We use CEO health shocks as a time-varying and physical managerial attribute that can change the degree of managerial effort. Using hand-collected data on CEO deaths and medical leaves to identify large health shocks, we find that firm value is considerably lower and corporate financial policies are largely less precarious (lower cash holdings, leverage, and return volatility) in the years preceding the death of the manager compared to a matched sample of firms. Chronic health conditions and weak governance environments primarily produce these effects. Stock prices also decline by about 2% when top managers take medical leaves. Overall, our results suggest that CEO health has important consequences for the performance and financial policies of firms.