CEO Succession: Insiders Versus Outsiders

Abstract

Using a data set containing more than 1,000 observations on CEO succession in large U.S. firms over the period 1974-1995, we examine empirically the choice between insiders and outsiders as CEO. We employ a theoretical framework in which firms value both the incentive that the contest to become CEO provides to insiders and the choice of a more able (whether insider or outsider) CEO. This framework predicts that a firm will be more likely to choose an insider to succeed to the CEO position where commonality among inside candidates is greater, where there are more inside candidates, and where the firm's industry is less homogeneous. Employing a novel measure of insider commonality based upon firm organizational structure and Parrino's (1997) measure of industry homogeneity, logistic regressions provide evidence consistent with each of these predictions and offer useful insight into firms' choice between insiders and outsiders as CEO.

JEL Classification: G3, L2, J41