Firm Competition and CEO Turnover: Evidence from US Railroad Deregulation

• DOI: http://doi.org/10.1111/fima.12201
• Author: Felipe Aldunate
• Published date: 01 June 2018
• Date: 01 June 2018

Firm Competition and CEO Turnover:

Evidence from US Railroad Deregulation

Felipe Aldunate∗

In this article, I examine how changes in the competitive environment of firms affect matches

between chief executive officers (CEOs) and firms. I exploit the 1980 Staggers Rail Act, which

drastically deregulatedthe freight railroad industry, as a source of arguably exogenous variation

in the operating environment. Using hand-collected data, I obtain three main findings: first,

CEO turnover rates increase;second, relative to utility firms, railroad CEOs have more business

education and show broader work experience after deregulation; and third, firm performance

leads to CEO turnover only during the regulated period.

There has been a trend in US firms over the last decades to hire chief executive officers (CEOs)

with more “managerial ability” (Frydman, 2007; Murphy and Zabojnik, 2007). The evidence

presented in the literature shows an increase in the percentage of CEOs with “general skills”

over CEOs with industry- or firm-specific skills. However, the process by whichCEOs and f irms

match is endogenous. Are firms demanding a different set of CEO skills or is the supply of these

skills by CEOs changing? At the same time, a different strand of literature has studied the effects

of deregulation events on CEO compensation (Hubbard and Palia, 1995; Cu˜

nat and Guadalupe,

2009a, 2009b).

In this article, I study CEO-firm matches around a deregulation event that changed the operating

environment and increased firm competition. I use the 1980 US railroad deregulation as a shock

to the operating environment. The Staggers Rail Act of 1980 represented a drastic shock to the

railroad operating environment. Heavily regulated for almost a century, railroads could not set

rates, choose the product mix to be transported,or exit from unprof itable routes without approvalof

the Interstate Commerce Commission (ICC), the federal entity in charge of regulation. Increased

competition from other transportation modes led several railroads to bankruptcy in the early

1970s. The 1980 Act introduced competition so that railroads could react to market forces and

increase their financial health. Figure 1 shows that the Staggers Act resulted in a significant

increase in railroad productivity. Managers suddenly faced a completely different environment

in which they could make broad strategic decisions concerning the future of their companies

and could deal directly with their customers. Grimm, Kling, and Smith (1987) report that the

deregulation resulted in a significant increase in the percentage of railroad executives working in

marketing and sales, in detriment to the percentage of executives working in operations.

I am extremely grateful to Dirk Jenter, Francisco P´

erez-Gonz´

alez, and John Beshears for guidance and discussions

on this paper. I would like to give special thanks to Rajkamal Iyer (Editor) and an anonymous referee for comments

that substantially improved the paper. I also thank Shai Bernstein, William Cong, Yesol Huh, Sebastian Infante, Doron

Israeli, Arthur Korteweg, Iv´

an Marinovic, Felipe Varas, and the seminar participants at the Joint Finance/Accounting

Stanfordstudent seminar for helpful discussions and comments. I acknowledge funding from ProyectoFondecyt Iniciaci´

on

#11160874. All errors aremy own.

∗FelipeAldunate is an Assistant Professor in the Business School at Pontificia Universidad Cat´

olica de Chile in Santiago,

Chile.

Financial Management •Summer 2018 •pages 451 – 476

452 Financial Management rSummer 2018

Figure 1. Aggregate Productivity of Class 1 Railroads

This figure presents two measures of aggregate productivity of Class 1 Railroads from 1970 to 1990. The Staggers Act of 1980 deregulated the railroad industry.

Ton-mile is a unit of measurement and stands for a ton of goods carried overone mile.