Who Loses a Leader Without Losing Ground? - Unexpected Death in Top Management Teams and Firm Performance

Abstract

Executive migration might cause a detrimental human capital loss with great replacement costs or trigger a disruptive shock within an organization. Events such as top management turnover often reduce future performance. The question addressed in this paper is thus whether such potential disruptive change to the top management team is an inevitable risk that is equally harmful to all organizations or whether, and why, some organizations can better absorb the expected negative impact of this shock. I address these questions by exploiting the exogenous variation in firm performance from unexpected deaths in top management teams. I investigate which firm characteristics mitigate the negative effects of this exogenous shock by estimating firm survival and sales growth models. I find that greater organizational capabilities and increasing organizational stability and routinization through continuity in the top management team mitigate the negative effects, leading to higher post-death performance. Conversely, I find that increasing stability in the employee composition, reflected by higher employee tenure, increases organizational vulnerability to this disruptive shock.