The Likely Effect of CEO Hiring Source on Total Cash Flow
41 Pages Posted: 13 Aug 2014 Last revised: 13 May 2015
Date Written: November 9, 2014
We examine the financial performance that firms realize by the decision to hire a new CEO from within the firm versus externally. Using a structural self-selection modeling approach, we find, for boards that hire externally, less total cash flow on average than would have been obtained from the passed over internal candidate (a marginal loss). A marginal gain is found for boards that promote internally. The marginal loss we find when hiring externally is not likely explained by theories based on maximizing firm value. Our results are consistent with behavioral theories involving overconfidence or with agency explanations.
Keywords: CEO turnover, overconfidence, agency problems
JEL Classification: G30; G32; G34
Suggested Citation: Suggested Citation