Career Concerns of Top Executives, Managerial Ownership and CEO Succession
35 Pages Posted: 28 Feb 2006
Date Written: 2006
We argue that portfolio choices can play a role in resolving asymmetric information problems between top managers who aspire to run the firm and the board of directors who must appoint a new CEO. Our intuition is that if ownership of the firm's stock serves to convey a manager's private information to the board, then ownership choices are partially determined by managerial career concerns and could affect the outcome of CEO succession. The outcome of CEO succession may, in turn, affect the career opportunities available to managers, which can affect both managerial ownership and executive departure decisions. In this context, we develop and test several predictions relating board and managers' decisions surrounding CEO turnover: 1- lower ownership by inside managers makes outside CEO appointments more likely; 2- higher ownership by an insider increases her chances of being appointed CEO; 3- non-appointed managers with higher ownership are more likely to reduce their ownership stake or to leave the firm following a CEO replacement; and 4- ownership reduction and departure decisions are more likely following outside CEO appointments. Using data on managerial ownership, executive departures, and board appointment decisions for 1,123 CEO turnover events, we find evidence supporting these predictions.
Keywords: Managerial compensation, CEO succession, Portfolio allocation
JEL Classification: G32, G34
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