Insider or outsider? The separate and joint effects of firm performance and diversification on CEO recruitment

Abstract

This study aims to investigate the effects of firm performance and diversification on the insider/outsider CEO hiring. Using a sample of 2204 CEO succession events occurred between 1979 and 2014 in the U.S., we find that the effect of firm performance on the likelihood of hiring insider CEOs is positive and significant, which is consistent with Datta and Guthrie (1994). Moreover, the impact of the level of firm diversification on the likelihood of hiring insider CEOs is also positive and significant. However, the level of firm diversification appears to have a strong moderating effect on the relationship between firm performance and the insider/outsider CEO hiring. More focused firms are more likely to hire outsider CEOs when firm performance is low, but hire insider CEOs as firm performance increases. By contrast, highly diversified firms are more likely to hire insider CEOs regardless of firm performance. The empirical results imply that both well-performing focused firms and highly diversified firms should implement a formal CEO succession plan by designating the internal candidates and grooming them to ensure that they are knowledgeable and ready to take over when the current CEO steps aside.