ABSTRACT
There has been a significant increase in CEO turnover rates during the past three decades (Kaplan and Minton, 2012). Partly because of these increasing turnover rates, there is also a growing interest among corporate boards, executive search firms and academic researchers to explore and identify the relationship between CEO turnover origin and subsequent firm performance. CEOs hired from outside the firm are three to five times more expensive on average than CEOs promoted from within the firm (Reda and Wert, 2013), but are these outsiders also performing better? Previous attempts to answer this question have generated mixed results. On the one hand, earlier studies argue that outside-appointed CEOs have acquired a more diverse set of skills that are especially valuable because of today’s complex business environment (Murphy and Zabojnik, 2007). Higher levels of compensation for outside-appointed CEOs generally reflect the higher value of outsiders’ diverse skill-set over the firm-specific skill-set that their inside-appointed counterparts (Custodio et al., 2013). Consistent with this line of reasoning, outside-appointed CEOs tend to outperform inside-appointed CEOs in the post-turnover environment. On the other hand, Bidwell (2011) argues that “external hiring will have two disadvantages for firms relative to internal mobility: external hires are likely to perform worse than internal movers but be paid more.” While these two lines of research agree on the compensation aspect of internal-versus-external appointees, they are diametrically opposed on the performance aspect of internal-versus-external appointees. The main purpose of our study is to examine this important relationship between CEO ‘insiderness’ and subsequent firm performance. This issue is especially important today given the increasing rate of CEO turnovers.
