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Career Concerns of Top Executives, Managerial Ownership and CEO Succession

  • M. Martin Boyer
  • Hernán Ortiz-Molina

We model the portfolio decisions by managers with career concerns in a context where ownership of the firm's stock can affect the outcome of promotion contests. In addition to their utility from wealth, such managers derive utility from the monetary and non-monetary benefits (prestige) of running a corporation. Our theory predicts that top managers competing for the CEO position will distort their investment decisions away from the optimum portfolio choice in the absence of career concerns. Thus, our model suggests that changing career opportunities can explain portfolio decisions by managers and that insider ownership can help explain the outcomes of promotion contests. Our main testable predictions are that higher ownership by insiders increases their chances of being appointed CEO; that lower ownership by inside managers makes outside CEO appointments more likely; and that a lower probability of CEO turnover (and thus reduced promotion opportunities) leads inside managers to reduce their ownership in the firm and/or to leave the company. Using data on managerial ownership surrounding CEO turnover events, we find evidence supporting the predictions of our model. Overall, our main insight is that insider ownership, the outcome of promotion contests, the choice between inside and outside CEO replacements, and executive departure decisions are all related. Nous développons un modèle de choix de portefeuille des gestionnaires dans un environnement où leurs chances d'être promu PDG sont liées à leur actionnariat dans l'entreprise. Puisque les gestionnaires valorisent leur nomination potentielle au rang de PDG, nous prédisons que leur choix de portefeuille sera biaisé par rapport au choix qu'ils auraient fait en l'absence d'anticipations carriéristes. Notre modèle prédit que des changements dans les chances d'être promu expliquent les choix de portefeuille des gestionnaires. En particulier, nous montrons empiriquement qu'un plus grand actionnariat augmente la chance d'ê

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Article provided by Wiley Blackwell in its journal Corporate Governance: An International Review.

Volume (Year): 16 (2008)
Issue (Month): 3 (05)
Pages: 178-193

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Handle: RePEc:bla:corgov:v:16:y:2008:i:3:p:178-193
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  1. 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.
  2. Anup Agrawal & Charles R. Knoeber & Theofanis Tsoulouhas, . "Are Outsiders Handicapped in CEO Successions?," Working Paper Series 003, North Carolina State University, Department of Economics, revised Apr 2004.
  3. Himmelberg, C.P. & Hubbard, R.G. & Palia, D., 1997. "Understanding the Determinants of Mangerial Ownership and the Link Between Ownership and Performance," Papers 97-21, Columbia - Graduate School of Business.
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  6. Michael Waldman, 2003. "Ex Ante versus Ex Post Optimal Promotion Rules: The Case of Internal Promotion," Economic Inquiry, Western Economic Association International, vol. 41(1), pages 27-41, January.
  7. Eli Ofek & David Yermack, 2000. "Taking Stock: Equity-Based Compensation and the Evolution of Managerial Ownership," Journal of Finance, American Finance Association, vol. 55(3), pages 1367-1384, 06.
  8. Robert Gibbons & Michael Waldman, 1999. "A Theory Of Wage And Promotion Dynamics Inside Firms," The Quarterly Journal of Economics, MIT Press, vol. 114(4), pages 1321-1358, November.
  9. Chan, William, 1996. "External Recruitment versus Internal Promotion," Journal of Labor Economics, University of Chicago Press, vol. 14(4), pages 555-70, October.
  10. Kole, Stacey R., 1997. "The complexity of compensation contracts," Journal of Financial Economics, Elsevier, vol. 43(1), pages 79-104, January.
  11. Huson, Mark R. & Malatesta, Paul H. & Parrino, Robert, 2004. "Managerial succession and firm performance," Journal of Financial Economics, Elsevier, vol. 74(2), pages 237-275, November.
  12. Sherwin Rosen, 1985. "Prizes and Incentives in Elimination Tournaments," NBER Working Papers 1668, National Bureau of Economic Research, Inc.
  13. Parrino, Robert, 1997. "CEO turnover and outside succession A cross-sectional analysis," Journal of Financial Economics, Elsevier, vol. 46(2), pages 165-197, November.
  14. Weisbach, Michael S., 1988. "Outside directors and CEO turnover," Journal of Financial Economics, Elsevier, vol. 20(1-2), pages 431-460, January.
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