CEO Turnover and Firm Diversification

41 Pages Posted: 27 Apr 2000

See all articles by Tammy K. Berry

Tammy K. Berry

Northern Illinois University - Department of Finance

Michael L. Lemmon

University of Utah - Department of Finance

John M. Bizjak

Texas Christian University

Lalitha Naveen

Temple University - Department of Finance

Date Written: March 22, 2000

Abstract

We test theories of managerial entrenchment and ability matching by examining the relation between CEO turnover and the level of firm diversification. Our results indicate that CEO turnover in diversified firms is completely insensitive to firm performance. Additional analysis indicates that for diversified firms voluntary turnover is not sensitive to firm performance, but that forced turnover is sensitive to performance. Even when turnover is forced, however, we find little evidence of restructuring of a diversified firm following CEO succession. We also find that new CEOs in diversified firms are paid more than CEOs in focused firms, and that the compensation premium is invariant to whether the turnover was voluntary or forced. Finally, we find evidence that diversified firms are more likely to have a formal succession plan, to replace the existing CEO with an insider, and hire older more educated executives. Taken together, the findings suggest that diversified firms tend to manage the succession process more carefully because they require CEOs with greater ability. The findings are not consistent with managerial entrenchment. Our study provides new evidence on how the nature and scope of the organization affects the succession process.

JEL Classification: G34

Suggested Citation

Berry, Tammy K. and Lemmon, Michael L. and Bizjak, John M. and Naveen, Lalitha, CEO Turnover and Firm Diversification (March 22, 2000). Available at SSRN: https://ssrn.com/abstract=219934 or http://dx.doi.org/10.2139/ssrn.219934

Tammy K. Berry

Northern Illinois University - Department of Finance

Wirtz Hall
DeKalb, IL 60115
United States

Michael L. Lemmon (Contact Author)

University of Utah - Department of Finance ( email )

David Eccles School of Business
Salt Lake City, UT 84112
United States
801-585-5210 (Phone)
801-581-7214 (Fax)

John M. Bizjak

Texas Christian University ( email )

Fort Worth, TX 76129
United States
817-257-4260 (Phone)

Lalitha Naveen

Temple University - Department of Finance ( email )

Fox School of Business and Management
Philadelphia, PA 19122
United States
215-204-6435 (Phone)

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