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Does experience matter? CEO successions by former CEOs

Does experience matter? CEO successions by former CEOs Purpose – This paper aims to investigate an interesting yet mostly ignored distinction within external CEO successions: outside successors who have previous CEO experience and those who do not. It examines stock market reaction, compensation and firm performance prior and post‐succession. Design/methodology/approach – The authors used an event study, “Patell Z ‐statistic” and “Rank Z ‐statistic” to test cumulative abnormal return before and after the successions. They also used probit and OLS regressions to examine firm performance and CEO compensation prior and post‐succession. Findings – The authors find that the stock market reacts positively to the hiring of an outsider who is an exCEO. Compared with firms that hire non‐exCEOs, firms that hire exCEOs had higher debt ratios and greater bankruptcy chances pre‐succession, but post‐succession, these firms still have worse financial performances. Non‐exCEOs come from better performing firms than exCEOs. There is no consistently significant difference in compensation between an exCEO and a non‐exCEO, though the compensation for both increases significantly from that of the predecessors and that of their previous positions. Research limitations/implications – Future research could focus on the cost‐benefit tradeoff of hiring an exCEO. It would be interesting to examine the role of the board of directors in assessing this cost‐benefit tradeoff and determining the optimal choice for the firm. An important aspect that has not been sufficiently examined in the literature is the CEO fit. Hiring an exCEO may not always be the right choice for the firm. Another area for future research could examine how the post‐succession performance is affected by exCEO tenure in previous CEO position(s) and whether the exCEO worked in several industries or in the same industry. Practical implications – This paper also has implications for the board of directors. There seems to be a negative transfer of human capital when it comes to hiring exCEOs. The human capital theory suggests that job‐specific experience positively relates to job performance. According to Hamori and Koyuncu, prior CEO experience may “lead to the formation of knowledge corridors and decision‐making templates that make it difficult for individuals to take in inconsistent information or take actions that are different from past ones in a changed context. This, in turn, undermines performance”. Boards of directors should put more effort into considering inside relay successions and should be cautious when hiring an outsider who has prior CEO experience. A best‐of‐both‐worlds scenario may be for boards to hire exCEOs into top executive positions, such as COO and/or president, so as to give them a chance to be groomed for the top position and familiarize themselves with the firm while still benefiting from their prior CEO experience. Originality/value – There is very little research on the distinction between outside CEOs with previous CEO experience and those with no such experience. This paper tries to shed some light on this important issue in corporate governance in order to explain why boards of directors would hire an outsider with or without previous CEO experience. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Managerial Finance Emerald Publishing

Does experience matter? CEO successions by former CEOs

Managerial Finance , Volume 37 (10): 25 – Aug 30, 2011

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References (75)

Publisher
Emerald Publishing
Copyright
Copyright © 2011 Emerald Group Publishing Limited. All rights reserved.
ISSN
0307-4358
DOI
10.1108/03074351111161583
Publisher site
See Article on Publisher Site

Abstract

Purpose – This paper aims to investigate an interesting yet mostly ignored distinction within external CEO successions: outside successors who have previous CEO experience and those who do not. It examines stock market reaction, compensation and firm performance prior and post‐succession. Design/methodology/approach – The authors used an event study, “Patell Z ‐statistic” and “Rank Z ‐statistic” to test cumulative abnormal return before and after the successions. They also used probit and OLS regressions to examine firm performance and CEO compensation prior and post‐succession. Findings – The authors find that the stock market reacts positively to the hiring of an outsider who is an exCEO. Compared with firms that hire non‐exCEOs, firms that hire exCEOs had higher debt ratios and greater bankruptcy chances pre‐succession, but post‐succession, these firms still have worse financial performances. Non‐exCEOs come from better performing firms than exCEOs. There is no consistently significant difference in compensation between an exCEO and a non‐exCEO, though the compensation for both increases significantly from that of the predecessors and that of their previous positions. Research limitations/implications – Future research could focus on the cost‐benefit tradeoff of hiring an exCEO. It would be interesting to examine the role of the board of directors in assessing this cost‐benefit tradeoff and determining the optimal choice for the firm. An important aspect that has not been sufficiently examined in the literature is the CEO fit. Hiring an exCEO may not always be the right choice for the firm. Another area for future research could examine how the post‐succession performance is affected by exCEO tenure in previous CEO position(s) and whether the exCEO worked in several industries or in the same industry. Practical implications – This paper also has implications for the board of directors. There seems to be a negative transfer of human capital when it comes to hiring exCEOs. The human capital theory suggests that job‐specific experience positively relates to job performance. According to Hamori and Koyuncu, prior CEO experience may “lead to the formation of knowledge corridors and decision‐making templates that make it difficult for individuals to take in inconsistent information or take actions that are different from past ones in a changed context. This, in turn, undermines performance”. Boards of directors should put more effort into considering inside relay successions and should be cautious when hiring an outsider who has prior CEO experience. A best‐of‐both‐worlds scenario may be for boards to hire exCEOs into top executive positions, such as COO and/or president, so as to give them a chance to be groomed for the top position and familiarize themselves with the firm while still benefiting from their prior CEO experience. Originality/value – There is very little research on the distinction between outside CEOs with previous CEO experience and those with no such experience. This paper tries to shed some light on this important issue in corporate governance in order to explain why boards of directors would hire an outsider with or without previous CEO experience.

Journal

Managerial FinanceEmerald Publishing

Published: Aug 30, 2011

Keywords: Compensation; exCEO; Stock market reaction; Firm performance; Non‐exCEO; Experience

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