The disciplining effect: how can board lose power after sudden deaths of CEOs?

Abstract

Using a database that includes U.S. public companies in which the former CEO has sudden passed away between the years 1995 and 2010, we investigate whether the sudden death of a CEO contributes to the reduction of the entrenchment level on the board of directors. We find that the board is not necessarily less entrenched following the sudden death of a CEO. Nonetheless, firms that elicit one outsider for the office of CEO are, on average, significantly less entrenched than the ones that elicit one insider for the same office following the death of the previous CEO. We call this the disciplining effect of CEO’s death. Our results are robust to two different measures of board entrenchment and also passed internal validity tests.

Keywords: executive succession, sudden death, board entrenchment, Dif-in-Dif