How CEO Career Diversity Affects a Company's Investment Efficiency
This research examines the influence of CEO career variety on corporate investment efficiency. The phenomenon is highly relevant given the importance of investment decision-making in the modern business world, where having a Chief Executive Officer with a career history spanning various industries, functions, and even countries is often considered an absolute advantage. Theoretical assumptions and several previous studies suggest that this wealth of experience makes leaders more agile in adapting and astute in making strategic decisions. However, an overly varied track record also raises concerns about declining commitment and a loss of focus on company-specific details. Therefore, this research is crucial because little attention has been paid to testing whether a stellar and varied Curriculum Vitae truly always leads to efficient investment decisions, especially when faced with the realities of emerging markets fraught with institutional uncertainty.
The study aims to explore the effect of CEO career variety on the level of corporate investment efficiency. The data used is sourced from hundreds of non-financial public companies listed on the Indonesia Stock Exchange (IDX) during the 2018 to 2021 period. Indonesia was chosen because it strongly represents the dynamics of a developing country. Indonesia faces challenges such as an imperfectly mature capital market, weak investor protection, and the highest Incremental Capital Output Ratio (ICOR) record in ASEAN, an indicator that national investment efficiency remains relatively low.
This research provides a theoretical contribution by expanding the understanding of Upper Echelons Theory, proving that the value of an executive’s career diversity is highly dependent on their business environment. From a practical perspective, the findings provide crucial guidance for shareholders and boards of directors not to be merely mesmerised by the long list of industries on a CEO candidate’s CV, but to carefully assess its relevance to the company’s ecosystem. The novelty of this research lies in testing the effect of career variety on two sides of inefficiency: the tendency to be overly bold in investing (overinvestment) or overly cautious in holding funds (underinvestment), using investment efficiency as a specific benchmark. The main objective is to answer the question: How does CEO career variety affect corporate investment efficiency in Indonesia?
To thoroughly dissect this phenomenon, the research employed a quantitative approach with panel data regression, strengthened by the Coarsened Exact Matching (CEM) method and the Heckman two-stage regression to ensure accurate results free from endogeneity bias. The dependent variable highlighted is investment efficiency, measured by how far the company’s actual investment deviates from its ideal level. Meanwhile, the main independent variable is CEO career variety, meticulously calculated by summing the CEO’s track record across different industrial sectors, companies, functional areas, and countries prior to their appointment. The analysis involved 941 firm-year observations and specifically dissected companies into groups prone to underinvestment and overinvestment.
The results revealed a surprising fact: the more varied a CEO’s career history, the more the company’s overall investment efficiency tends to decline. The findings show an asymmetric effect. These generalist CEOs are indeed excellent at curbing ambitions so the company does not waste money excessively (overinvestment). However, their caution often causes the company to miss golden opportunities for growth because they hold back too many funds (underinvestment). This occurs because the CEO’s broad work experience can weaken their detailed understanding of company-specific knowledge and loosen their networks with local stakeholders, which are crucial in developing countries. Ultimately, companies led by CEOs with highly diverse backgrounds must strengthen board oversight and tighten evaluations, such as post-investment audits, to ensure the wheels of growth do not slow down.