IDEAS home Printed from https://ideas.repec.org/p/cir/cirwor/2004s-34.html
   My bibliography  Save this paper

Career Concerns of Top Executives, Managerial Ownership and CEO Succession

Author

Listed:
  • M. Martin Boyer
  • Hernan Ortiz Molina

Abstract

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'être promu au rang de PDG, réduit la chance qu'un gestionnaire externe à l'entreprise soit nommé. De plus, une réduction dans la possibilité d'être promu réduit l'actionnariat des gestionnaires ou induit leur départ. Nous testons les hypothèses découlant du modèle en utilisant les changements dans l'actionnariat des gestionnaire lors de la démission du PDG. Les hypothèses importantes du modèle sont confirmées.

Suggested Citation

  • M. Martin Boyer & Hernan Ortiz Molina, 2004. "Career Concerns of Top Executives, Managerial Ownership and CEO Succession," CIRANO Working Papers 2004s-34, CIRANO.
  • Handle: RePEc:cir:cirwor:2004s-34
    as

    Download full text from publisher

    File URL: http://www.cirano.qc.ca/files/publications/2004s-34.pdf
    Download Restriction: no

    Other versions of this item:

    References listed on IDEAS

    as
    1. Naveen, Lalitha, 2006. "Organizational Complexity and Succession Planning," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 41(03), pages 661-683, September.
    2. Lazear, Edward P & Rosen, Sherwin, 1981. "Rank-Order Tournaments as Optimum Labor Contracts," Journal of Political Economy, University of Chicago Press, vol. 89(5), pages 841-864, October.
    3. Kole, Stacey R., 1997. "The complexity of compensation contracts," Journal of Financial Economics, Elsevier, vol. 43(1), pages 79-104, January.
    4. Marco Pagano & Fabio Panetta & and Luigi Zingales, 1998. "Why Do Companies Go Public? An Empirical Analysis," Journal of Finance, American Finance Association, vol. 53(1), pages 27-64, February.
    5. Chan, William, 1996. "External Recruitment versus Internal Promotion," Journal of Labor Economics, University of Chicago Press, vol. 14(4), pages 555-570, October.
    6. Rosen, Sherwin, 1986. "Prizes and Incentives in Elimination Tournaments," American Economic Review, American Economic Association, vol. 76(4), pages 701-715, September.
    7. C. Edward Fee, 2003. "Raids, Rewards, and Reputations in the Market for Managerial Talent," Review of Financial Studies, Society for Financial Studies, vol. 16(4), pages 1315-1357.
    8. La Porta, Rafael & Lopez-de-Silanes, Florencio & Shleifer, Andrei & Vishny, Robert, 2000. "Investor protection and corporate governance," Journal of Financial Economics, Elsevier, vol. 58(1-2), pages 3-27.
    9. Agrawal, Anup & Knoeber, Charles R. & Tsoulouhas, Theofanis, 2006. "Are outsiders handicapped in CEO successions?," Journal of Corporate Finance, Elsevier, vol. 12(3), pages 619-644, June.
    10. Leland, Hayne E & Pyle, David H, 1977. "Informational Asymmetries, Financial Structure, and Financial Intermediation," Journal of Finance, American Finance Association, vol. 32(2), pages 371-387, May.
    11. McConnell, John J. & Servaes, Henri, 1990. "Additional evidence on equity ownership and corporate value," Journal of Financial Economics, Elsevier, vol. 27(2), pages 595-612, October.
    12. Gibbons, Robert & Murphy, Kevin J, 1992. "Optimal Incentive Contracts in the Presence of Career Concerns: Theory and Evidence," Journal of Political Economy, University of Chicago Press, vol. 100(3), pages 468-505, June.
    13. repec:hrv:faseco:30728041 is not listed on IDEAS
    14. Bebchuk, Lucian A. & Fried, Jesse M., 2003. "Executive Compensation as an Agency Problem," Berkeley Olin Program in Law & Economics, Working Paper Series qt81q3136r, Berkeley Olin Program in Law & Economics.
    15. 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.
    16. Jaskiewicz, P. & González, V. M. & Menéndez, S. & Schiereck, D., 2005. "Long-run IPO Performance Analysis of German and Spanish Family-Owned Business," Publications of Darmstadt Technical University, Institute for Business Studies (BWL) 35079, Darmstadt Technical University, Department of Business Administration, Economics and Law, Institute for Business Studies (BWL).
    17. Lucian Arye Bebchuk & Jesse M. Fried, 2003. "Executive Compensation as an Agency Problem," Journal of Economic Perspectives, American Economic Association, vol. 17(3), pages 71-92, Summer.
    18. Parrino, Robert, 1997. "CEO turnover and outside succession A cross-sectional analysis," Journal of Financial Economics, Elsevier, vol. 46(2), pages 165-197, November.
    19. Himmelberg, Charles P. & Hubbard, R. Glenn & Palia, Darius, 1999. "Understanding the determinants of managerial ownership and the link between ownership and performance," Journal of Financial Economics, Elsevier, vol. 53(3), pages 353-384, September.
    20. Arya, Anil & Mittendorf, Brian, 2005. "Offering stock options to gauge managerial talent," Journal of Accounting and Economics, Elsevier, vol. 40(1-3), pages 189-210, December.
    21. Matthew C. Clayton & Jay C. Hartzell & Joshua Rosenberg, 2005. "The Impact of CEO Turnover on Equity Volatility," The Journal of Business, University of Chicago Press, vol. 78(5), pages 1779-1808, September.
    22. 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, June.
    23. La Porta, Rafael & Florencio Lopez-de-Silanes & Andrei Shleifer & Robert W. Vishny, 1997. " Legal Determinants of External Finance," Journal of Finance, American Finance Association, vol. 52(3), pages 1131-1150, July.
    24. Conyon, Martin J, 1998. "Directors' Pay and Turnover: An Application to a Sample of Large UK Firms," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 60(4), pages 485-507, November.
    25. 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.
    26. Weisbach, Michael S., 1988. "Outside directors and CEO turnover," Journal of Financial Economics, Elsevier, vol. 20(1-2), pages 431-460, January.
    27. Carpenter, Jennifer N., 1998. "The exercise and valuation of executive stock options," Journal of Financial Economics, Elsevier, vol. 48(2), pages 127-158, May.
    28. James Johnston, 2005. "Reward design and CEO succession in the UK," Applied Economics, Taylor & Francis Journals, vol. 37(13), pages 1535-1541.
    29. Benjamin E. Hermalin & Michael S. Weisbach, 1988. "The Determinants of Board Composition," RAND Journal of Economics, The RAND Corporation, vol. 19(4), pages 589-606, Winter.
    30. Salim Chahine & Igor Filatotchev & Mike Wright, 2007. "Venture Capitalists, Business Angels, and Performance of Entrepreneurial IPOs in the UK and France," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 34(3-4), pages 505-528.
    31. Robert Gibbons & Michael Waldman, 1999. "A Theory of Wage and Promotion Dynamics Inside Firms," The Quarterly Journal of Economics, Oxford University Press, vol. 114(4), pages 1321-1358.
    32. 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.
    33. Bognanno, Michael L, 2001. "Corporate Tournaments," Journal of Labor Economics, University of Chicago Press, vol. 19(2), pages 290-315, April.
    34. DeMarzo, Peter M & Duffie, Darrell, 1995. "Corporate Incentives for Hedging and Hedge Accounting," Review of Financial Studies, Society for Financial Studies, vol. 8(3), pages 743-771.
    35. Trueman, Brett, 1986. "Why do managers voluntarily release earnings forecasts?," Journal of Accounting and Economics, Elsevier, vol. 8(1), pages 53-71, March.
    36. Downes, David H & Heinkel, Robert, 1982. " Signaling and the Valuation of Unseasoned New Issues," Journal of Finance, American Finance Association, vol. 37(1), pages 1-10, March.
    37. Michael Spence, 1973. "Job Market Signaling," The Quarterly Journal of Economics, Oxford University Press, vol. 87(3), pages 355-374.
    38. Bruce K. Behn & Richard A. Riley & Ya-wen Yang, 2005. "The Value of an Heir Apparent in Succession Planning," Corporate Governance: An International Review, Wiley Blackwell, vol. 13(2), pages 168-177, March.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Stephen Chen, 2010. "The Role of Ethical Leadership Versus Institutional Constraints: A Simulation Study of Financial Misreporting by CEOs," Journal of Business Ethics, Springer, vol. 93(1), pages 33-52, June.
    2. Mobbs, Shawn & Raheja, Charu G., 2012. "Internal managerial promotions: Insider incentives and CEO succession," Journal of Corporate Finance, Elsevier, vol. 18(5), pages 1337-1353.
    3. Allgood, Sam & Farrell, Kathleen A. & Kamal, Rashiqa, 2012. "Do boards know when they hire a CEO that is a good match? Evidence from initial compensation," Journal of Corporate Finance, Elsevier, vol. 18(5), pages 1051-1064.

    More about this item

    Keywords

    managerial compensation; CEO succession; corporate tournament; portfolio allocation; rémunération des dirigeants; changement de PDG; tournoi corporatif; choix de portefeuille;

    JEL classification:

    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:cir:cirwor:2004s-34. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Webmaster). General contact details of provider: http://edirc.repec.org/data/ciranca.html .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.