Essays in corporate finance
This thesis studies the effects of CEO succession gaps (differences in personal traits between the predecessor and successor) on subsequent firm performance (Chapter 2), and firm future risk-taking (Chapter 3). Market reactions to the revelation of CEO succession gaps among S&P 500 firms spanning the period 1992 to 2016 are finally presented in Chapter 4. In Chapter 2, I examine the effect of succession-induced gaps in CEO characteristics on subsequent firm performance. Findings in this chapter show that a gap index constructed using differences in CEO attributes resulting from the succession process leads to deteriorating subsequent firm performance when the succession event itself is characterized as disruptive. However, under non-forced succession and when pre- succession performance has been good, a change in characteristics contributes positively to enhancing subsequent firm performance. Analysis of the channels through which value changes are affected suggest that radically different CEOs are more likely to bring with them a higher proportion of co-opted directors, make downsizing and business divesting decisions, and lead firms characterized by higher levels of post-succession strategic instability when there is a mandate for change. Overall, my findings demonstrate that tapping successors who bring in a new set of attributes that are markedly different from those of their predecessors may not always lead to value-enhancement. In Chapter 3, I investigate the relationship between succession-induced gaps in CEO risk-taking attributes and subsequent firm risks. Findings in this chapter show that the risk-taking gap index constructed using several CEO personal attributes is positively related to subsequent firm risk, especially under forced removal, poor pre-succession firm performance, and external succession. Furthermore, I find that under the aforementioned three circumstances, CEOs with risk-taking gaps increase firm risk through implementing riskier financing policies (higher financial leverage), operating policies (higher operating leverage), investment policies (higher R&D intensity and/ or lower capital expenditure) and diversification strategies (higher Herfindahl-Hirschman Index and/ or less business segments within which the firm operates). Overall, findings in this chapter suggest that CEOs’ personal risk-taking attributes in non-economic contexts have serious implications for firms’ risk-taking policies and overall risk profile. Finally, in Chapter 4, I examine the price effect of succession-induced gaps in CEO characteristics. Results show that under forced removals and when pre-succession firm performance has been poor, market participants react favorably to successors with relatively high levels of succession gaps. The magnitude of CARs is 2.64% (4.35%) for the High Gap group under forced succession (poor pre-performance) over the [-5,+5] event window. For firms tapping successors with relatively low levels of succession gaps under forced removals or successions following poor performance, however, the cumulative abnormal returns are neither economically nor statistically significant during the 11-day event window. This is because instead of affecting effective changes, tapping a successor sharing similar personal traits with his/ her predecessor will simply indicate organizational inertia and may fail to signal management quality improvements. Consistent with my hypothesis, for firms under non-forced successions or when pre- succession performance has been good, the cumulative abnormal returns following the revelation of CEO succession gaps is not statistically different from zero during the [-5,+5] event period for both incoming CEOs with high and low succession gaps, due to the fact that the event itself implies a continuation of firm policy and does not convey any new information to investors.
Advisor: Bhabra, Gurmeet; Tan, Eric; Chou, Daisy (Hsin-I); Han, Xing
Degree Name: Doctor of Philosophy
Degree Discipline: Accountancy and Finance
Publisher: University of Otago
Keywords: CEO; Succession
Research Type: Thesis