The Effects of CEO Succession Planning on Shareholder Wealth

We examine the lack of planning in CEO successions and its effect on shareholder wealth for 162 cases of no succession planning. We attribute the lack of potential or actual permanent replacement at the time of the announcement of departure or actual departure of the CEO to the great need for an outsider selection to lead the company. Our findings suggest that the effect of relaxing the time constraint to choose a successor is mixed. An increase in shareholders wealth will reward boards that are able to select an outsider. Companies that appoint an insider after an interim period have a poorer performance than companies that appoint an insider in an orderly succession process. We find that the lack of succession planning does not affect long term performance if boards are willing to put effort towards selecting the most suitable candidates.