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

Nagel, Gregory Leo, The Likely Effect of CEO Hiring Source on Total Cash Flow (November 9, 2014). Available at SSRN: or

Gregory Leo Nagel (Contact Author)

Middle Tennessee State University ( email )

P.O. Box 50
Murfreesboro, TN 37132
United States

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