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Are Outsiders Handicapped in CEO Successions?

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  • Anup Agrawal

    ()
    (Cluverhouse College of Business, University of Alabama)

  • Charles R. Knoeber

    ()
    (Department of Economics, North Carolina State University)

  • Theofanis Tsoulouhas

    ()
    (Department of Economics, North Carolina State University)

Abstract

We argue that outsiders are handicapped in CEO successions to strengthen the incentive that the contest to become CEO provides inside candidates. Handicapping implies that a firm is more likely to pick an insider for the CEO position where insiders are more comparable to each other and less comparable to outsiders, and where there are more inside candidates. Using a novel measure of the comparability of insiders based on firm organizational structure, we analyze over 1,000 CEO successions in large U.S. firms over the 1974-1995 period and find a variety of evidence consistent with these implications of handicapping.

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Paper provided by North Carolina State University, Department of Economics in its series Working Paper Series with number 003.

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Date of revision: Apr 2004
Publication status: Forthcoming in Journal of Corporate Finance, 2004
Handle: RePEc:ncs:wpaper:003

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  1. Sherwin Rosen, 1985. "Prizes and Incentives in Elimination Tournaments," NBER Working Papers 1668, National Bureau of Economic Research, Inc.
  2. Mike Burkart & Fausto Panunzi & Andrei Shleifer, 2002. "Family Firms," Harvard Institute of Economic Research Working Papers 1944, Harvard - Institute of Economic Research.
    • Mike Burkart & Fausto Panunzi & Andrei Shleifer, 2003. "Family Firms," Journal of Finance, American Finance Association, vol. 58(5), pages 2167-2202, October.
  3. Steven N. Kaplan, 1993. "Top Executives, Turnover and Firm Performance in Germany," NBER Working Papers 4416, National Bureau of Economic Research, Inc.
  4. Coughlan, Anne T. & Schmidt, Ronald M., 1985. "Executive compensation, management turnover, and firm performance : An empirical investigation," Journal of Accounting and Economics, Elsevier, vol. 7(1-3), pages 43-66, April.
  5. Lazear, Edward P, 1989. "Pay Equality and Industrial Politics," Journal of Political Economy, University of Chicago Press, vol. 97(3), pages 561-80, June.
  6. Edward P. Lazear & Sherwin Rosen, 1979. "Rank-Order Tournaments as Optimum Labor Contracts," NBER Working Papers 0401, National Bureau of Economic Research, Inc.
  7. Chan, William, 1996. "External Recruitment versus Internal Promotion," Journal of Labor Economics, University of Chicago Press, vol. 14(4), pages 555-70, October.
  8. Parrino, Robert, 1997. "CEO turnover and outside succession A cross-sectional analysis," Journal of Financial Economics, Elsevier, vol. 46(2), pages 165-197, November.
  9. Borokhovich, Kenneth A. & Parrino, Robert & Trapani, Teresa, 1996. "Outside Directors and CEO Selection," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 31(03), pages 337-355, September.
  10. Kaplan, Steven N, 1994. "Top Executive Rewards and Firm Performance: A Comparison of Japan and the United States," Journal of Political Economy, University of Chicago Press, vol. 102(3), pages 510-46, June.
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