AbstractWhen the CEO‐owner of an SME suddenly dies, who should take over? Integrating the social embeddedness perspective with research on crisis management, we theorize that an SME's financial health gets progressively worse before it stabilizes and recovers, reflecting an inverse U‐shaped relationship between time since the CEO‐owner's sudden death and an SME's financial distress. We then explore how successors' family and firm embeddedness moderate this relationship. Using a longitudinal sample of Swedish SMEs, we find general support for our theorizing. While nonfamily successors lead to less financial distress than family successors immediately following a CEO‐owner's sudden death, the opposite occurs in the long term. Further, successors with high firm embeddedness are associated with less financial distress than those with low firm embeddedness in both the short‐ and long‐term. Additionally, our post‐hoc analyses reveal that successors with high firm embeddedness, independent of their family embeddedness, outperform those low in firm embeddedness. Family successors lacking firm embeddedness report the highest financial distress, whereas family successors with high firm embeddedness experience the lowest. Our social embeddedness perspective on succession after the CEO‐owner's sudden death therefore contends that successor embeddedness explains differences in an SME's financial health, with the importance of successor firm tenure overshadowing the effect of family status.
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