CEO Turnover and Firm Diversification

Abstract

We test theories of managerial entrenchment and ability matching by examining the relation between CEO turnover and the level of firm diversification. Our results indicate that CEO turnover in diversified firms is completely insensitive to firm performance. Additional analysis indicates that for diversified firms voluntary turnover is not sensitive to firm performance, but that forced turnover is sensitive to performance. Even when turnover is forced, however, we find little evidence of restructuring of a diversified firm following CEO succession. We also find that new CEOs in diversified firms are paid more than CEOs in focused firms, and that the compensation premium is invariant to whether the turnover was voluntary or forced. Finally, we find evidence that diversified firms are more likely to have a formal succession plan, to replace the existing CEO with an insider, and hire older more educated executives. Taken together, the findings suggest that diversified firms tend to manage the succession process more carefully because they require CEOs with greater ability. The findings are not consistent with managerial entrenchment. Our study provides new evidence on how the nature and scope of the organization affects the succession process.