When Do Outside CEOs Underperform? From a CEO-centric to a Stakeholder-centric Perspective of Post-succession Performance

Academy of Management Journal, Forthcoming

Bocconi University Management Research Paper

54 Pages Posted: 6 Jul 2021

See all articles by Thomas Keil

Thomas Keil

University of Zurich - Department of Business Administration

Dovev Lavie

Bocconi University - Department of Management and Technology

Stevo Pavićević

Frankfurt School of Finance & Management

Date Written: July 5, 2021

Abstract

How does the appointment of an outside CEO affect the hiring firm’s performance? Prior research reports that outside CEOs tend to underperform compared to inside CEOs, with high performance variance. Extending CEO-centric perspectives, we predict that experiential learning enhances post-succession performance, while negative transfer learning undermines it. We then offer a novel, stakeholder-centric theoretical perspective, conjecturing that stakeholders’ negative sentiment toward the CEO appointment undermines post-succession performance. We further conjecture that outside CEOs are less effective in leveraging their executive experience and suffer more from negative transfer and negative sentiment compared to inside CEOs, who can leverage their familiarity and social embeddedness in the firm, which explains why outside CEOs may underperform. Analyzing the appointments of CEOs in US public firms, we find that counter to expectations, the length and breadth of their executive experience do not explain post-succession performance nor the performance differences between outside CEOs and inside CEOs. Rather, the misfit between the CEOs’ corporate background and their firms’ characteristics and the negative sentiment surrounding their appointments explain performance differences and the underperformance of outside CEOs. Accordingly, our study directs attention to the important yet previously understudied reactions of stakeholders to CEO appointments.

Keywords: CEO appointment, CEO succession, CEO experience, corporate fit, negative transfer learning, stakeholder sentiment, inside CEO, outside CEO, firm performance

Suggested Citation

Keil, Thomas and Lavie, Dovev and Pavićević, Stevo, When Do Outside CEOs Underperform? From a CEO-centric to a Stakeholder-centric Perspective of Post-succession Performance (July 5, 2021). Academy of Management Journal, Forthcoming, Bocconi University Management Research Paper, Available at SSRN: https://ssrn.com/abstract=3880469

Thomas Keil

University of Zurich - Department of Business Administration ( email )

Seilergraben 53
Zurich, CH-8001
Switzerland

HOME PAGE: http://www.business.uzh.ch/professorships/international-management/team/keil.html

Dovev Lavie (Contact Author)

Bocconi University - Department of Management and Technology ( email )

Via Roentgen 1
Milan, MI 20136
Italy

Stevo Pavićević

Frankfurt School of Finance & Management ( email )

Adickesallee 32-34
Frankfurt am Main, 60322
Germany

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