Abstract
This paper investigates whether and how lead time in CEO succession matters by comparing disruption costs in firms with planned retirements to those with unexpected CEO departures due to death or illness. Using a comprehensive manually-collected dataset of CEO turnovers from 1999 to 2008, I find evidence that firms with planned CEO retirements have significantly longer lead time and lower disruption costs. Specifically, longer lead time is associated with more favorable cumulative stock performance and firm operating performance around the outgoing CEO’s departure. In fact, firms can save approximately $136 million when there is lead time to plan for succession.
Highlights
CEO succession planning is the process by which the board of directors prepares for the transition of leadership from one CEO to the
90% of the new CEOs have been a director for at least 3.5 years prior to the incumbent CEO’s departure. These findings suggest that when faced with an unexpected CEO departure when the incumbent CEOs are no longer involved in the succession process and when there is less time to plan for succession, firms tend to appoint a successor with lengthy firm and board experience to weather the storm
Given the large magnitude of the change in firm value associated with a lack of lead time, I argue that it is doubtful that the costs of not planning for succession will outweigh the benefits
Summary
CEO succession planning is the process by which the board of directors prepares for the transition of leadership from one CEO to the next. Firms with unexpected CEO departures lack incumbent CEOs’ involvement in the selection process, and are less likely to have time to prepare for CEO succession if there is no plan already in place, may experience greater disruption costs. 90% of the new CEOs have been a director for at least 3.5 years prior to the incumbent CEO’s departure These findings suggest that when faced with an unexpected CEO departure when the incumbent CEOs are no longer involved in the succession process and when there is less time to plan for succession, firms tend to appoint a successor with lengthy firm and board experience to weather the storm.
Sign-in/Register to view highlights & summary Sign-in/Register to access full text options 
Talk to us
Join us for a 30 min session where you can share your feedback and ask us any queries you have
Schedule a callDisclaimer: All third-party content on this website/platform is and will remain the property of their respective owners and is provided on "as is" basis without any warranties, express or implied. Use of third-party content does not indicate any affiliation, sponsorship with or endorsement by them. Any references to third-party content is to identify the corresponding services and shall be considered fair use under The CopyrightLaw.
