Abstract
The role of directors in CEO succession events has evolved in recent decades with the emergence of the newly created CEO labor market. In this context, directors can potentially assist companies to identify prospective CEOs in the interests of investors or use their expanded role to serve their own and management’s interests. We explore this issue through examining the impact of professional director/CEO relationships in 1,136 outsider CEO successions over the past three decades, spanning a range of institutional environments in developed and developing markets and across a range of company accounting and market-based financial indicators. We find that these relationships can serve both investors’ and management’s interests subject to the specific approach taken to corporate governance in Anglo-American, European, and Asian national institutional environments. Effects also differ across accounting- and market-based measures of financial performance. These findings reflect a previously unexplored conditional theoretical relationship between information asymmetries that affects investors, boards and CEOs. In characterizing the conditional nature of this relationship, this paper makes a unique theoretical contribution to the CEO succession literature’s understanding of the role of information asymmetry and its effect on board/CEO ties in the CEO labor market.
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