Board Connections and CEO Successions

Abstract

This paper studies the effects of connections between CEO candidates and board members on CEO succession decisions. Boards that have stronger connections with potential CEO candidates are more likely to replace their incumbent CEOs, especially when performance is poor. CEO candidates’ connections with the hiring board increase their probability of being hired. CEO-board connections improve post-succession operating performance. The effects are more pronounced for younger CEOs and firms with stronger governance. Well-connected CEOs have longer tenure and more incentives to develop long-term growth opportunities, thus increasing post-succession innovation intensity and quality. Overall, board connections provide valuable information in CEO succession, improve firm performance, and increase firm investment efficiency.

Keywords: CEO succession, succession planning, CEO replacements, social networks, board connections, corporate governance, agency problem, managerial labor markets, information frictions

JEL Classification: G34, J20