CEO Succession Roulette

Regulators, credit rating agencies, and securities analysts consider poor succession planning a significant business risk. However, there is surprisingly little academic research about how succession planning affects CEO turnover decisions. Using comprehensive data for U.S. public firms, we highlight three dimensions in which succession planning improves executive turnover. Firms with disclosed succession plans (i) exhibit higher leadership stability, (ii) experience lower uncertainty around CEO turnovers and faster learning about CEO ability, and (iii) rely on well-developed performance metrics and firm-specific information in CEO dismissal decisions. Our findings indicate that succession planning improves the efficiency and lowers the cost of management transitions