CEO Appointments and the Loss of Firm-Specific Knowledge - Putting Integrity Back into Hiring Decisions

33 Pages Posted: 25 May 2008

See all articles by Katja Rost

Katja Rost

University of Zurich - Institute for Organization and Administrative Science

Sören Salomo

Danish Technical University

Margit Osterloh

University of Basel; Professor (em.) University of Zurich

Abstract

A rarely studied trend in corporate governance is the increasing tendency to fill CEO openings through external hires rather than through internal promotions: Kevin J. Murphy and Ján Zábojník (2004) show that the proportion of outside hires has doubled and their pay premium almost quadrupled over the last thirty years. Assuming that general managerial skills are becoming more important relative to firm-specific skills, the authors conclude that competition in the managerial labor market establishes optimal contracts. In our model and our empirical analysis we question this explanation by assuming that over the past decades the dishonesty of the predecessor has become relatively more important for the appointment decisions of firms. We conclude that outside hires are a suboptimal trend because external candidates even step up the regression of integrity in firms: As nobody has an incentive to invest in firm-specific knowledge, not only the performance of firms drops, but also the remaining integrity.

Keywords: CEO Appointments, external hires, suboptimal contracts

JEL Classification: G34, J23, J41, M52

Suggested Citation

Rost, Katja and Salomo, Sören and Osterloh, Margit, CEO Appointments and the Loss of Firm-Specific Knowledge - Putting Integrity Back into Hiring Decisions. Available at SSRN: https://ssrn.com/abstract=1123883 or http://dx.doi.org/10.2139/ssrn.1123883

Katja Rost

University of Zurich - Institute for Organization and Administrative Science ( email )

Plattenstrasse 14
CH-8032 Zurich
Switzerland

Sören Salomo

Danish Technical University ( email )

TEM Center
Produktionstorvet, Bygn. 421
Kgs. Lyngby (Copenhagen), 2800
Denmark

Margit Osterloh (Contact Author)

University of Basel ( email )

Petersplatz 1
Basel, CH-4003
Switzerland

Professor (em.) University of Zurich ( email )

Südstrasse 11
Zürich, CH-8008
Switzerland

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