CEO Succession Gap and Firm Performance

50 Pages Posted: 1 Oct 2019

See all articles by Renzhu Zhang

Renzhu Zhang

University of Otago - Department of Accountancy and Finance

Gurmeet S. Bhabra

University of Otago - Department of Accountancy and Finance

Hsin-I Chou

RMIT University; University of Otago - Department of Accountancy and Finance

Eric K. M. Tan

University of Queensland - Business School

Date Written: July 18, 2019

Abstract

In this study, we examine the effect of succession-induced gaps in CEO characteristics on subsequent firm performance. We show that a gap index constructed using differences in CEO attributes between the predecessor and the successor leads to deteriorating subsequent firm performance when the succession event itself is characterized as disruptive. However, under non-forced succession and when pre-succession performance has been good, a change in characteristics contributes positively to enhancing subsequent firm performance. Further analysis of the channels suggests that radically different CEOs are more likely to bring with them a higher proportion of co-opted directors, make downsizing and business divesting decisions, and lead firms characterized by higher levels of post- succession strategic instability when there is a mandate for change. Overall, our findings demonstrate that tapping successors who bring in a new set of attributes that are markedly different from those of their predecessors are not always value-enhancing. This is especially the case under forced succession and when the pre-succession firm performance is poor.

Keywords: CEO, Succession, Gap Index, Performance

JEL Classification: G30, G32, J62, J63

Suggested Citation

Zhang, Renzhu and Bhabra, Gurmeet S. and Chou, Hsin-I and Tan, Eric K. M., CEO Succession Gap and Firm Performance (July 18, 2019). Available at SSRN: https://ssrn.com/abstract=3456866 or http://dx.doi.org/10.2139/ssrn.3456866

Renzhu Zhang (Contact Author)

University of Otago - Department of Accountancy and Finance ( email )

Dunedin
New Zealand
+64274917441 (Phone)

Gurmeet S. Bhabra

University of Otago - Department of Accountancy and Finance ( email )

PO Box 56
Dunedin
New Zealand
64-3-4795124 (Phone)
64-3-8194 (Fax)

Hsin-I Chou

RMIT University ( email )

Australia

University of Otago - Department of Accountancy and Finance ( email )

PO Box 56
Dunedin, 9054
New Zealand

Eric K. M. Tan

University of Queensland - Business School ( email )

Brisbane, Queensland 4072
Australia

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