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The impact of CEO turnover on firm performance around interim successions

Abstract

Prior research reports that financial performance of firms that hire interim CEO successors is worse following interim CEO appointments than those that hire permanent successors. We find that this underperformance occurs only following voluntary turnover interim appointments, which represent a small fraction of all voluntary turnovers and roughly a quarter of all interim appointments. We do not observe poor performance when boards hire interim successors following instances of forced departure. Further analysis shows that poor performance during voluntary turnover interim successions are limited to using operating performance measures; market performance is not significantly worse following interim successions. Our results indicate that many interim appointments should not be viewed as value decreasing endeavors and future research on post-succession financial performance should consider the circumstances surrounding the turnover of the predecessor.

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Notes

  1. For example, see Gephart (1978), Pitcher et al. (2000), Cannella and Shen (2001), and Shen and Cannella (2002).

  2. For example, see Kesner and Sebora (1994), Denis and Denis (1995) and Clayton et al. (2005).

  3. Intintoli (2012) utilizes CEO turnover observations obtained from Forbes annual compensation surveys from 1984 to 2005 where we extend Intintoli’s sample to 2007 and add an Execucomp based sample of turnover observations.

  4. We exclude these observations because the influence of the interim appointment on firm performance should be minimal to none for interims that only hold the top post for 45 days or less. We drop nine observations where the interim succession period lasts <45 days, but find similar results if these observations are included.

  5. Note that our regression analysis slightly differs from Ballinger and Marcel (2010) in that (1) we use actual performance measures for each quarter where Ballinger and Marcel average each measure across each progressive quarter, (2) we use year dummies to control for the time series influence on turnover, where a year independent variable is used in Ballinger and Marcel and (3) we control for insider ownership, board attributes, and financial leverage in our regressions. We thank anonymous referees for the suggestion of the modification of Ballinger and Marcel (2010) model. However, our main results are materially unchanged if we strictly follow the methodology of Ballinger and Marcel.

  6. We thank an anonymous referee for pointing out this issue.

  7. We thank an anonymous referee for pointing out this issue.

  8. We thank an anonymous referee for pointing out this issue.

  9. We explore different definitions of Tobin’s Q and obtain similar results.

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Acknowledgments

We thank the editor and 3 anonymous referees for helpful comments. We would also like to thank Robert Parrino for graciously sharing his pre-1996 CEO turnover data. Naoko Fox and Amine Khayati provided excellent research assistance.

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Correspondence to Wallace N. Davidson III.

Appendices

Appendix 1

See Table 9.

Table 9 Variable definitions

Appendix 2

See Table 10.

Table 10 Operational performance (ROE) and interim CEO successions

Appendix 3

See Table 11.

Table 11 Operational performance (change in ROA) and interim CEO successions

Appendix 4

See Table 12.

Table 12 Market performance (buy-and-hold returns) and interim CEO successions

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Intintoli, V.J., Zhang, A. & Davidson, W.N. The impact of CEO turnover on firm performance around interim successions. J Manag Gov 18, 541–587 (2014). https://doi.org/10.1007/s10997-012-9253-2

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Keywords

  • CEO turnover
  • Interim succession
  • Corporate governance