Abstract
We find that pre-existing professional ties with a firm's board significantly increase a CEO candidate's probability of being hired by the firm. Considering all CEOs hired this year as potential candidates, a board-connection corresponds to a 152% increase in the probability the candidate is selected as CEO. Consistent with the hypothesis that boards select connected candidates to increase shareholder value, we find significantly greater firm performance improvement after CEO turnovers for firms hiring connected CEOs than those hiring unconnected CEOs. Further, the performance increases are significant only among firms with severe information asymmetry, large CEO termination risk, and high coordination costs. We also find that connected CEOs make better acquisitions than unconnected CEOs. These results suggest connected hiring increases firm performance because it reduces information asymmetry, CEO termination risk, and CEO-board coordination costs. Inconsistent with boards rendering favors to friends, connected CEOs are not awarded a larger pay package when they assume office. Overall, our results suggest that it pays for a firm to hire a CEO with pre-existing ties to the board.
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