Are CEOs judged on how cost efficient their firms are?

This paper investigates whether executive boards consider firm-specific inefficiencies when they change CEOs in the Swedish electricity distribution sector. Firm-level inefficiencies are calculated using data from all Swedish electricity distributors from 2001 to 2022 and a data envelopment analysis (DEA) approach. DEA has advantages over standard financial key performance indicators since it controls heterogeneity in inputs and outputs. It is also frequently employed by energy regulators to calculate relative cost inefficiencies. Our baseline approach uses a multilevel model and investigates the relationship between inefficiency and CEO between-effects. This analysis shows that 9–15 % of the variation in inefficiency can be attributed to the CEO effect. The second modeling approach quantifies the CEO effect using a synthetic difference-in-differences approach, focusing on firms that have changed CEOs. The results reveal that new CEOs reduce cost inefficiency more when they succeed CEOs who were forced to leave. • The CEO effect among Swedish electricity distributors is investigated. • A new model is developed to estimate the CEO effects using data envelopment analysis. • CEOs have a meaningful impact on firm performance measured as inefficiencies. • The results support the upper-echelon theory. • Electricity distributors can improve cost efficiency by replacing bad-performing CEOs.