Can Non-CEO Inside Directors Add Value? Evidence From Unplanned CEO Turnovers

Abstract

This paper investigates the roles of non-CEO inside directors (NCIDs) in the new CEO-firm matching process using the context of unplanned CEO departures when immediate CEO succession planning becomes a sole board responsibility. Although critics argue that inside directors decrease the monitoring effectiveness of a board, inside directors arguably possess superior firm specific experience and knowledge that can be beneficial during the leadership transition. Using a comprehensive, manually collected data set of unplanned CEO departures from 1993 to 2012, we find evidence that firms with NCIDs incur lower costs and have stronger performance after an unplanned CEO departure. The impact of NCIDs is particularly important when the firm hires an outsider as the new CEO. These results suggest that board composition affects frictions in the CEO labor market.

Keywords: Corporate Governance, CEO Succession, CEO Turnover, Board of Directors

JEL Classification: G30, G34