CEO Succession Gap and Firm Performance

Abstract

In this study, we examine the effect of succession-induced gaps in CEO characteristics on subsequent firm performance. We show that a gap index constructed using differences in CEO attributes between the predecessor and the successor leads to deteriorating subsequent firm performance when the succession event itself is characterized as disruptive. However, under non-forced succession and when pre-succession performance has been good, a change in characteristics contributes positively to enhancing subsequent firm performance. Further analysis of the channels suggests that radically different CEOs are more likely to bring with them a higher proportion of co-opted directors, make downsizing and business divesting decisions, and lead firms characterized by higher levels of post- succession strategic instability when there is a mandate for change. Overall, our findings demonstrate that tapping successors who bring in a new set of attributes that are markedly different from those of their predecessors are not always value-enhancing. This is especially the case under forced succession and when the pre-succession firm performance is poor.

Keywords: CEO, Succession, Gap Index, Performance

JEL Classification: G30, G32, J62, J63