Outsider CEO succession and firm performance

We examine outside CEO succession for 528 firms during the period 1993–2009. Announcement-period returns are positive, but higher for firms hiring from within their industry than from a different industry. However, unlike the year following succession, firms hiring from a different industry display better stock performance in later years. In the 5-year post-succession period dividends, profitability, capital spending and growth potential are also higher for firms hiring from a different industry. Firms with fewer, more independent board members who also sit on other major company boards, or firms in industries with fewer companies are more likely to hire successors whose pay is more aligned to stockholder returns from bigger firms with more business segments and stock return volatility in a different industry. Firms hiring from a different industry pay successors more but grant more incentive pay than firms hiring from the same industry. Our findings suggest that, overall, firms pay more, link compensation more to their subsequent stock performance, and amass more long-term benefits when they hire outside CEO successors from a different industry than their own.

► We examine outside CEO succession for 528 firms during the period 1993–2009.
► Returns are positive, but higher for firms hiring from within than from a different industry.
► Firms hiring from a different industry display better stock performance in the later years.
► Post-succession dividends, profitability, capital spending and growth are lower for firms hiring from same industry.
► Firms hiring from a different industry pay successors more but grant more incentive pay.