Heir to the Throne: Choice of the Replacement CEO in Unexpected CEO Turnover
47 Pages Posted: 3 Sep 2012
Date Written: August 27, 2012
We examine the roles board of directors can play in CEO succession planning, by asking the questions, whom should the firm choose as replacement CEOs in unexpected CEO turnover, and what is the impact of this decision on shareholder wealth? More specifically, we build on the director expertise literature and investigate whether the selection of replacement CEOs from the board facilitates a smoother transition and maintain firm continuity. We focus on unexpected CEO turnover, as it provides an exogenous setting allowing us to examine the impact of the CEO replacement decision on costs associated with the succession and on shareholder wealth post succession. Overall, our results indicate that in addition to its monitoring and advising roles, the board of directors can also oversee the company when needed. While selecting replacement CEO from existing board members may allow the company to quickly fill the CEO position, thereby reducing uncertainty and transitional costs (measured by new CEO turnover, senior management turnover and delay), it may not be beneficial to shareholders. We provide evidence that replacing departing CEO with a board member is negatively associated with stock performance for up to two years.
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