The Relation between Strategy, CEO Selection, and Firm Performance

Posted: 16 Aug 2018

See all articles by Margaret A. Abernethy

Margaret A. Abernethy

University of Melbourne, Department of Accounting

Yu Flora Kuang

The University of Melbourne

Bo Qin

The University of Melbourne

Date Written: July 4, 2018

Abstract

We examine whether a firm’s strategic priorities influence their selection of a new CEO and what conditions enable such an appointment to add value to the firm. More specifically, this study investigates the value-adding effect when prospector firms (i.e., those pursuing a prospector-type strategy) select a CEO with high social capital. We argue that uncertainty, driven by a firm’s strategy, will determine the decision to select a CEO with high social capital; such CEOs can use their networks to mitigate the uncertainty and thus can be valuable to the firm. However, prior research indicates that CEOs with high social capital can engage in behavior detrimental to firm value. To mitigate the potential for this to occur, we assess whether corporate governance can play a role in prospector firms who appoint CEOs with high social capital. Drawing on archival data of CEO successions over a 14-year period, we find that prospector firms have greater incentives to appoint CEOs with high social capital. We also find prospector firms who appoint a CEO with high social capital improve their performance. Furthermore, the value-adding effect of this selection choice is stronger in prospector firms with good corporate governance.

Keywords: firm strategy, social capital, CEO selection, corporate governance, firm value

Suggested Citation

Abernethy, Margaret A. and Kuang, Yu and Qin, Bo, The Relation between Strategy, CEO Selection, and Firm Performance (July 4, 2018). Contemporary Accounting Research, Forthcoming. Available at SSRN: https://ssrn.com/abstract=3225219

Margaret A. Abernethy (Contact Author)

University of Melbourne, Department of Accounting ( email )

Victoria
Melbourne, Victoria 3010 3010
Australia
+61 3 8344 7655 (Phone)
+61 3 9349 2397 (Fax)

Yu Kuang

The University of Melbourne ( email )

Level 7, The Spot
198 Berkeley St
Carlton, Victoria 3053
Australia
+61383449361 (Phone)
+61393492397 (Fax)

Bo Qin

The University of Melbourne ( email )

Level 8, Department of Accounting
Carlton, Victoria 3053
Australia
+61383449361 (Phone)
+61393492397 (Fax)

HOME PAGE: http://www.findanexpert.unimelb.edu.au/display/person743093#tab-overview

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