CEO Succession Roulette
43 Pages Posted: 2 Nov 2016 Last revised: 4 Nov 2019
Date Written: November 1, 2019
Regulators, credit rating agencies, and securities analysts consider poor succession planning a significant business risk that destroys billions in firm value. However, little is known about the specific benefits of succession planning for CEO turnover. Using comprehensive data on the succession planning practices of U.S. public firms, we highlight three dimensions in which succession planning improves executive turnover decisions. Firms with succession plans (i) exhibit higher levels of leadership stability, (ii) experience lower uncertainty around successions and faster learning about CEO ability, (iii) rely primarily on firm-specific information and more sophisticated evaluation metrics in CEO dismissals. Our findings indicate that succession planning improves the efficiency and lowers the cost of management transitions.
Keywords: CEO turnover, succession planning, executive labor market, CEO ability, performance evaluation
JEL Classification: G34, J24, J33, J41
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