'Passing the Baton': How Relay Affects Firm Performance and Volatility

Abstract

This paper examines the effects of incoming CEOs' years being an heir apparent (relay length) on firm post-turnover performance and volatility. I estimate heirs apparent based on non-CEO executives' promotion likelihood estimated from a set of executive characteristics. I find robust evidence that firms with longer relay attain higher post-turnover accounting performance, higher long-term stock returns, and lower volatility. Furthermore, the effects on performance are stronger for firms with more specific human capital. These results suggest the important role of relay in smoothing CEO transitions. The paper also shows that the difference between inside and outside successions as found in previous studies is fully explained by firms' relay length.