Institutional Investors and the Appointment of Prestigious CEOs

Abstract

The appointment of a new CEO is among the most pivotal and visible decisions made by the board of directors. Yet while prior research provide insight into how firm specific factors influence the nature of the appointment, we know less about the role played by contextual factors such as external constituents. We focus on the role of institutional investors – who control more than 70% of all corporate equity holdings – on the board’s appointment of a prestigious CEO. The prestige of an executive provides a signal that can influence investors’ perceptions and valuation of the firm. In light of the uncertainty that executive succession creates regarding the company’s future, prestige may be an important attribute that the board considers in appointing an external CEO. Using panel data on S&P 500 companies for the 2000-2005 period, we find evidence that the level of institutional investor stock ownership is positively associated with the appointment of a CEO with directorial prestige. In addition, we find that a decline in institutional investor stock ownership is predictive of the appointment of a CEO with employment prestige.