A Game of Thrones – Dynamics of Internal CEO Succession and Outcome

Abstract

We examine the dynamics of firms’ internal succession methods and find that horse race successions are common among the largest U.S. firms. Although heir and horse race CEO candidates are of similar quality, the consequences of these two succession methods differ significantly. We show that horse race successions induce conflict and are detrimental to the firm but not to the newly appointed CEOs. Our findings suggest firm’s succession methods influence the CEO labor market, CEO compensation, and firm performance. These findings highlight the importance of CEO succession planning in the form of grooming an heir.

Keywords: CEO Turnover; Executive Compensation; Tournaments; Board of Directors

JEL Classification: G30; J33; M52