The Effect Of CEO Succession On Firm Performance

The core of modern enterprise system is the separation of ownership andmanagement. As the highest agent of a company, CEO becomes the one who makesdecisions and runs the company. Therefore, the management ability of CEO affectsthe firm performance directly. With the development of capital market in China, listedcompanies begin to play a vital role in our national economy. The CEOs of listedcompanies naturally become focus. When listed companies need a new CEO, theymay choose to promote an insider or hire an outsider which corresponding to thefirm’s internal labor market and external labor market. According to internal labormarket theory, the internal labor market has both its advantages and disadvantageswhen compared with the external labor market. Combining with our special economicbackground and internal labor market theory, this paper discusses CEO succession oflisted companies and its impact on firm performance. To the extent that this study mayenrich the internal labor market theory. Meanwhile, it also has meaning to improvecorporate governance of listed companies and establish modern employmentmechanism.Basing on internal labor market theory, this article uses2003-2011succeedingCEO data of A-share listed companies as a study sample. The origin of CEOsuccession is further divided into external employment, internal promotion, associatedcompanies, government, university, military, founder and unrecognized. Externalemployment is classified as outside succession, which is corresponding to the externallabor market. Inversely, other types are classified as inside succession, which iscorresponding to the internal labor market. Then, combining with the results ofoverseas and domestic research, this paper builds a Logit model to study the factors ofthe origin of CEO succession in our country and uses univariate test to study theeffect of the origin of CEO succession on firm performance. The empirical researchreveals, firstly, that the main factors of the origin of CEO succession in our countryare the ownership nature of the ultimate controller, firm size, board size and shareratio of the largest shareholder. While, neither firm financial performance nor marketperformance affects the origin of CEO succession. Secondly, regardless of the type ofCEO succession, firm performance is improved when a new CEO succeeds. Lastly,insider successors, either firm financial performance (roa) or market performance(bhar), are significantly superior to outside successors. And this result is also supported in the robustness test. The results in this paper conform to the view ofinternal labor market theory. The CEO from internal labor market can reduce theagency cost and training cost. Internal promotion can also inspire other employees towork harder. Meanwhile, inside successors learn about the corporate culture better. Allthese advantages make inside successors have better performance than outsidesuccessor. Efficient labor market, however, cannot only be made up of internal labormarket. The balanced development of internal and external labor market is the keypoint that our listed companies and capital market can develop sustainably.