Internal CEO Research Articles

Internal information asymmetry and power distance

Using the difference in insider trading profitability between top and lower-level managers to proxy for firms’ internal information asymmetry, we show that power distance increases internal information asymmetry in an international sample of 10,103 firms across 22 economies from 2003 to 2018. Furthermore, we find that this positive impact is lessened for firms with less complexity, more female directors on board, or an internal CEO promoted from within the firm. Moreover, we show that a country’s high-quality formal institutions lessen the role that a country’s culture of power distance plays in escalating internal information asymmetry. Our main conclusions remain valid after taking into account robustness and endogeneity issues.

DOES CEO PROMOTE INNOVATION IN SMEs? A COMPARISON BETWEEN INTERNAL AND EXTERNAL CEO

Internal and external hired CEOs could differently affect company investment behaviour and capability to encourage strategic changes and entrepreneurship, such as innovation activity. Based on a sample of 13,749 European manufacturing SMEs, the paper shows that CEO has a significant effect on the innovative activities in SMEs. However, this effect is negative in case the CEO is appointed from the external of the company, while the effect becomes positive in case of internal CEO. These findings remark that external CEO may lack firm-specific knowledge to manage the innovation process and experience with firms’ available resources and innovation capabilities.

Mixed ownership in the face of technological change:Response to digitization in telecommunications

This study examines how the ownership structure of corporations shapes their response to technological change. In our empirical analysis, we focus on how European telecommunications operators responded to digitization. We predict that mixed ownership, a situation in which, following privatization, the shares of a company are partly privately held and partly held by the government, is associated with lower responsiveness to digitization. We theorize that CEOs and top management of corporations with mixed ownership are exposed to conflicting views on how companies should address the challenges posed by technological change, thereby making them more likely to maintain the status quo. Our data on European telecommunications operators that had to adapt to the advent of internet-based communication services provide support for our conjectures. In addition, the analysis shows that mixed ownership is particularly problematic when firms are led by an internal CEO and when they integrate extramural digital technology, which lends further support to the proposed theoretical mechanism.

Stock market reactions to CEO succession announcements: inside versus outside recruitment?

Sparse attention has been paid to the analysis of stock market reactions of external versus internal CEO appointments. This article seeks to fill this research gap by conducting an event study of stock market reactions to CEO succession announcements based on a sample of Danish, Swedish and Finnish firms. Danish stock market rewards externally appointed candidates, whereas the Swedish stock market reacts negatively in the case of internal CEOs. It is argued that national legal and institutional differences put different constraints on the power of CEOs. The impact of internal versus external CEO successors is therefore very much country dependent. Furthermore, it is shown that past firm performance does not significantly influence abnormal returns in all the three countries. Abnormal returns are also linked to individual CEO characteristics. The analysis shows positive significant stock market reactions only when the age difference increases between a new internal and a former CEO.

Market Evaluation Versus Reputation: Two Approaches to CEO Overcompensation and Effects on CSR

This study explores the impact of CEO overcompensation from two perspectives, the economic-based view and the cognition- based view, on the socially responsible activities of the firms. To compare the behavioral differences for each compensation, we defined CEO overcompensation into two types: (1) internal overcompensation (CEO compensation relative to average compensation of other executives) and (2) external overcompensation (CEO compensation relative to average labor market rate). Using a sample of 6,269 firms and 1,076 CEOs over more than a decade, we found that internal overcompensation dampened CSR efforts due to strong CEO internal dominance power pursuing their imminent self-interests. By contrast, external overcompensation enhanced CSR performance because of the CEOs’ personal desire to preserve their status. Moreover, age, industry CSR performance, and the firm’s financial performance moderated the main relationships, supporting the contingent roles of CEO overcompensation, highlighting distinct interests in personal reputation versus market evaluation. Age and industry CSR positively moderated the effect of external overcompensation on CSR, and financial performance fulfilled a similar but apposite function on the relationship between internal CEO power effects and investments toward CSR activities. In sum, contradicting CSR performance resulted from different approaches were supported.

CEO Succession Mechanisms, Organizational Context, and Performance: A Socio‐Emotional Wealth Perspective on Family‐Controlled Firms

AbstractThis article extends the literature on CEO succession and financial performance by addressing corporate owners' mixed motives and desires to protect their interest in being in business. We draw on a Socio‐Emotional Wealth (SEW) perspective to investigate how the choice of one of three succession mechanisms – relay succession, ‘horse races’ among internal CEO candidates, and hiring from outside – may effectively balance trade‐offs between corporate owners' non‐financial SEW motives and the firm's financial performance. We find that implementing one of these succession mechanisms reduces the negative impact that typically characterizes CEO transitions in family firms. We also show that family presence on the board of directors offsets the benefits of having selected these balancing succession mechanisms, in either placing too much emphasis on SEW, or creating negative dynamics that make the chosen succession mechanisms less effective.

The influence of top management corporate networks on CEO succession

We analyze empirically how supervisory board members with multiple directorships affect the decision to hire an inside or outside CEO successor. While a growing number of both theoretical and empirical studies analyze the influence of corporate performance and size or the ownership structure on this decision, the role of multiple board memberships within the CEO recruitment process has been widely neglected so far. The present study is based on panel data of the largest German companies covering the period from 1996 to 2008. Applying competing risk estimations we find a weak and positive association between the number of external directorships of the supervisory board members and internal CEO replacements. Distinguishing between different groups of external board positions, we find that external executives on the supervisory board increase the likelihood of external CEO replacements. In line with empirical findings for the US we argue that external executives improve the assessment of potential CEO successors leading to more outside CEO replacements. In contrast, we find evidence that external supervisory board mandates of the supervisory board members cause more internal CEO replacements. This finding indicates a substitution of external expertise of the executives by multiple supervisory board mandates but could also reflect a reduction of the monitoring intensity of the supervisory board.

Equity Issuance, Corporate Governance Reform and CEO Turnover in the UK

This paper examines the determinants of forced CEO turnover in a sample of UK firms during a period of substantial reforms in the board structure of domestic companies. Following the publication of the Cadbury Report (1992) UK listed companies increased their use of non-executive directors and were more willing to separate the functions of the CEO and the Chairman of the Board. We present strong evidence that greater outside director representation on company boards and separating the functions of the Chairman and the CEO lead to higher rates of forced CEO turnover, but this is not focused on the managers of poorly performing companies. The sensitivity of CEO turnover to company performance is greatest amongst companies that issue new equity. We also find that external CEO succession is more likely following forced turnover and is increasing in likelihood with the fraction of outside directors on company boards. Issues of new equity, and in particular placings, are correlated with internal CEO succession.

Share Price Reactions to Ceo Resignations and Large Shareholder Monitoring in Listed French Companies

This study has analysed the share price reactions to changes in top management. A distinction was made among different types of CEO turnover: forced resignation, voluntary departures and age-related retirements. The announcement of a forced CEO resignation is hailed favourably by the market with a small but significantly positive abnormal return of 0.5%. The market may have anticipated the forced turnover since the abnormal return over a one-month period prior to the turnover amounts to 6%. Whereas voluntary resignations do not cause a price reactions, age-related turnover triggers a small negative price reaction. Subsequently, a more detailed classification of the change of top management was made based on the background of the successor (an internal versus external candidate), on the size of the corporation and the degree of corporate diversification. Expectedly, the nomination of an external manager following the performance-related forced resignation of a CEO causes a strong increase in abnormal returns of more than 2%. The cumulative abnormal return of an internal CEO promotion in a poorly performing firms drops by almost 1% on the day of the announcement. Presumably, this is because the internal manager is held (partially) responsible for past poor performance. In companies with good past performance and with internal succession, there is a price decline, but this is not statistically significant. The paper also analysed which corporate governance mechanisms are responsible for forced CEO turnover. A logit regression which accounted for time and industry specific fixed effects did not reveal a relation between performance and turnover. Furthermore, institutional investors, banks and the government do not seem to provoke CEO departures even if they own large blocks of equity. We did not find evidence that the government exerts control in the companies in which it holds majority shareholdings. In contrast, when industrial companies are major owners, there is evidence that forced turnover is facilitated. It also seems that it is easier to remove management in smaller companies than in larger ones. On the part of holding companies, there is only some evidence that they take a monitoring role in the case of other listed holding companies. No correlation was discovered between the degree of leverage and forced CEOs departures, although CEO turnover is facilitated if creditors have their own representatives on the board. Likewise, a high proportion of shareholder representatives on the board leads to a higher probability of forced CEO resignations. However, this probability decreases when the founding family is represented by one or more (executive) directors.