External succession and disruptive change: heirs-apparent, forced turnover and firm performance

Abstract

In general, CEO succession is disruptive to an organization, and external succession is especially disruptive. We analyze the impact on firm performance of disruption caused by external succession. Although traditional analysis of the succession process has emphasized the importance of a smooth transition to minimize disruption, research on external succession has emphasized the benefits of bringing in an outsider to shake things up. We investigate the impact on firm performance of three factors that affect the extent of disruption in external succession: forced turnover, which is generally viewed as highly disruptive; prior appointment of an external successor as an outside heir, in order to reduce disruption; and prior appointment as an outside heir with a public promise of becoming CEO. The results suggest that disruption in the form of forced turnover is associated with higher post-succession firm performance. The appointment of external successors as outside heirs first does not appear to be associated with improved firm performance. In addition, outside heir appointments with a public promise may be associated with somewhat worsened performance.