The Importance of Executive Effort

Agency theory stipulates that managerial effort is important to shareholders and costly for managers to provide. Executives may provide sub-optimal levels of effort because shareholders cannot easily observe the day-to-day actions of managers and therefore have difficulties properly monitoring the effort provided by firm management. Researchers also face the challenge of measuring executive effort. In this dissertation, I use an observable measure of leisure consumption to proxy for the effort provided by executives to study the impact of executive effort on firm outcomes.

In the first essay, I focus on Chief Executive Officers (“CEOs”) and the impact of their effort on firm performance. I document that equity-based incentives are an important determinant of the effort provided by CEOs and that CEO effort impacts the operating performance of firms, which is highly consistent with agency theory. A series of robustness tests suggest the relation is causal. In the second essay, I focus on the effort provided by Chief Financial Officers (“CFOs”) and its impact on financial reporting quality. I document that CFO effort impacts the financial reporting quality of firms and that this variation in reporting quality is observed by auditors and market participants. Overall, these results support the importance of executive effort in determining firm performance.