Easy Clean-ups or Forbearing Improvements: The Effect of CEO Tenure on Successor’s Performance

70 Pages Posted: 3 Feb 2023

See all articles by Gonul Colak

Gonul Colak

University of Sussex ; Hanken School of Economics

Eva Liljeblom

Swedish School of Economics and Business Administration

Date Written: August 25, 2022

Abstract

Long CEO tenure can harm firm performance even after the CEO is replaced. We analyze this issue by conditioning post-turnover firm performance on the length of the preceding CEO’s tenure. Identification comes from instrumenting sudden CEO deaths as an exogenous shock to tenure length. We find that when a successor takes over after a long-tenured CEO, operating performance and stock returns are significantly lower, restructuring costs are higher, “big baths” are larger, and firm recovery is slower. Weaker corporate governance and a long-tenured CEO with lower skills amplify these post-turnover effects.

Keywords: CEO Tenure; CEO Term Limits; Restructuring Costs; Shareholder Value; Firm Performance; Hazard Model

JEL Classification: G3, G34, J24, M41, M43

Suggested Citation

Colak, Gonul and Liljeblom, Eva, Easy Clean-ups or Forbearing Improvements: The Effect of CEO Tenure on Successor’s Performance (August 25, 2022). Journal of Financial Stability, Forthcoming, Available at SSRN: https://ssrn.com/abstract=4346975 or http://dx.doi.org/10.2139/ssrn.4346975

Gonul Colak (Contact Author)

University of Sussex ( email )

Jubilee Building
Falmer
Brighton, BN1 9SN
United Kingdom

Hanken School of Economics ( email )

P.O. Box 479
Arkadiankatu 22
FI-00100 Helsinki, 00100
Finland

Eva Liljeblom

Swedish School of Economics and Business Administration ( email )

P.O. Box 479
FI-00101 Helsinki, 00101
Finland
+358-9-431 33 291 (Phone)
+358-9-431 33 393 (Fax)

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