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

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