UC Berkeley

This dissertation examines the profitability and management of public US corporations since the 1950s. I argue that a shift in their ability to turn a profit helps us understand why today’s corporations are run more as portfolios of assets than as organic wholes. Even while aggregate corporate profits have risen, public US corporations have become more likely to fail to turn a profit since the 1970s. Losses—instances of negative net income—are a signal a firm is not a good candidate for long-term organic growth. As a result, widespread losses at public US firms today encourage corporate managers and boards to focus on acquiring and divesting assets—whether business units, executives, or technologies—rather than committing locked-in investments to generate economic value in the long run. This dissertation focuses on two corporate strategies that encapsulate this view that corporations are portfolios of exchangeable assets: outside CEO succession—CEOs being hired from outside the firm rather than promoted from within—and acquisitions. I present evidence that high losses at public US corporations since the 1990s have contributed to elevated rates of outside CEO hiring and acquisitions and are therefore a material basis of the corporation-as-portfolio perspective. This suggests that understanding why losses are so high at public US corporations—the average yearly loss rate has been over 33% since 1985 and higher in recent years—is important for gauging the health of the American economy.

The dissertation centers on three empirical studies. The first two focus on outside CEO succession at large public corporations. In the first empirical chapter, I examine how losses and other measures of firm performance predict outside CEO hiring at 317 of the largest public US corporations between 1950 and 2015, defined as those ranked in the top 110 by revenue at least once based on 5-year snapshots. New CEOs hired directly from outside the firm were rare at these large firms before 1990, increased sharply in the 1990s, and have remained elevated in the 21st century. I bridge the gap between two important but disconnected lines of research on American corporations—one focused on the shareholder value movement, the other on changes in corporate profits—to trace this devaluation of inside managers to a previously undocumented rise in low-profit spells at large corporations. Despite increased median profits, large public US corporations have become much more likely to fail to turn a profit. These losses encouraged subsequent outside CEO hiring through the 1990s, and rising losses help explain 30% of the late-20th-century increase in outside hires at these large firms. After 2000, outside CEO hires remained common and became primarily a response to low stock return. This chapter extends the well-documented effect of poor profitability on outside CEO hiring to provide one of the first estimates of how changing corporate profits have reshaped corporate governance. Rising losses in the 1980s-1990s pressed large corporations to frequently change course and increased demand for outside CEOs meant to promote this flexibility.

The second empirical chapter turns to the cultural change and stability that accompanied this rise in outside CEO hires. I analyze text from news articles announcing CEO hires at the 150 largest firms of my sample (i.e., firms ranked in the top 50 by revenue at least once based on 5-year snapshots 1950-2015). I use two supervised machine learning models commonly used for text analysis—support vector machines and random forests—to predict whether a new CEO was hired from outside or inside the firm based on words and phrases from the announcement articles. After evaluating which model and hyperparameters yielded the best predictions, I consider feature importance scores from models trained on articles from three distinct periods—1950-1989, 1990-2000, and 2001-2015—to examine the language characterizing outside CEO hires when they were rare, rising, and high at large corporations. I find that despite churn in the words and phrases used to describe outside CEOs, there is a consistent model of outside succession across the sample period: outside CEOs were hired to be strong managers of poor performing firms. Yet in the 1990s, when outside succession was rising sharply at these firms in response to increased losses, outside hire announcements became longer, more distinctive, and more focused on pressures from consumer and equity markets. Finally, after 2000 outside hire announcements became more highly rationalized, focusing less on outside CEOs’ status and more on the concrete work experiences that made them qualified for the job. These results connect sociological accounts of the search for charismatic CEOs during the shareholder value revolution to financial economic explanations of executive mobility focused on transferable skills.

In the final study, I broaden my scope to all public US corporations to investigate the connection between historically high losses and acquisitions between 1973 and 2019 and how these have contributed to rising concentration within US industries since the 1990s. Research on this rising market concentration tends to focus on the strategies of high-profit star firms. Yet economic and organizational sociology have long argued that profitability crises and organizational death are key drivers of economic change, and I draw on these perspectives to analyze the flip side of rising monopoly power in the United States. To do this, I connect rising market concentration to not just high rates of losses but also a sharp decline in the number of public US corporations over the past twenty-five years. I examine how today’s high losses could have contributed to rising market concentration through increased acquisitions, a primary driver of the falling number of public firms. I find evidence that losses encourage firms to be acquired and that high acquisitions rates since the mid-1990s have contributed to increases in the concentration of sales within industries. In contrast, loss rates within industries do not seem to drive concentration increases. These results demonstrate that corporate weakness and not just strength have contributed to rising market concentration. Public US corporations have routinely failed to turn a profit in past decades, and we should recognize that this has hindered stable and widespread economic growth: not only have losses encouraged outside CEO hiring, they have also contributed to high acquisition rates, and this has increased market concentration among public US firms.