Corporate Succession Practices and the Impact on Portfolio Returns

40 Pages Posted: 14 Apr 2021 Last revised: 6 May 2022

See all articles by Claudio Fernandez-Araoz

Claudio Fernandez-Araoz

Harvard Business School

Carrie Green

Tennessee Consolidated Retirement System

Gregory Leo Nagel

Middle Tennessee State University

Date Written: May 5, 2022

Abstract

A publication in HBR claims that succession practices expected to maximize the hiring firm's value reduce shareholders' portfolio value, mainly due to intellectual capital losses at firms supplying talent. This paper substantiates and extends that claim using: literature, direct calculation, portfolio analyses, subsamples, and an economic model. We assume managers' value-maximizing assignment to jobs. The reduction in real returns for the S&P 1500 portfolio is 0.98 percentage points per year. Exceptional executive types do not mitigate this loss. Our research motivates portfolio holders to focus on succession practices and contrasts with research on common ownership. We suggest proxy voting practices.

Keywords: Portfolio, Internal Hire, External Hire, Executive, CEO, Stakeholder Value

Suggested Citation

Fernandez-Araoz, Claudio and Green, Carrie and Nagel, Gregory Leo, Corporate Succession Practices and the Impact on Portfolio Returns (May 5, 2022). Available at SSRN: https://ssrn.com/abstract=3824812 or http://dx.doi.org/10.2139/ssrn.3824812

Claudio Fernandez-Araoz

Harvard Business School ( email )

Boston, MA 02163
United States
5491144706000 (Phone)

Carrie Green

Tennessee Consolidated Retirement System ( email )

United States

Gregory Leo Nagel (Contact Author)

Middle Tennessee State University ( email )

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

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