CEO Succession Roulette
55 Pages Posted: 2 Nov 2016 Last revised: 24 Feb 2021
Date Written: February 23, 2021
Despite intense scrutiny from investors, markets, and regulators, most public companies have no formal succession plans. Anecdotal evidence links succession risk to significant value destruction, but there is limited academic research evaluating the effects of succession planning on CEO turnover outcomes. We show that succession planning lowers the cost of management transitions by improving their efficiency, as evidenced by lower stock return volatility around turnover events. We attribute the higher efficiency to (i) faster learning about the incoming CEO’s ability and better CEO-firm fit, and (ii) reliance on firm-specific information and clearly defined performance measures in CEO dismissals. Our findings indicate that succession planning enhances the efficiency of both CEO hiring and CEO dismissal outcomes.
Keywords: CEO turnover, succession planning, executive labor market, CEO ability, CEO performance evaluation
JEL Classification: G34, J24, J41
Suggested Citation: Suggested Citation