Succession

Abstract:

Managing CEO succession is one of the board’s most important tasks. We develop a dynamic model of CEO succession to analyze executive hiring, firing, and entrenchment. The board learns about the CEO’s and successor’s ability and can decide to replace the executives internally or externally. Our model explains the board’s preference towards internal CEO successions, which become more likely with more efficient executive labor markets. We also demonstrate that the CEO’s ability to sabotage the successor can make the CEO more entrenched but can also backfire and get the CEO fired.