The Role of Outside Shareholders, Outside Boards, and Management Entrenchment in CEO Selection

Large outside shareholders, outside boards, and management entrenchment influence the choice of inside or outside CEOs. In a sample of 385 CEO changes from 1979 to 1986, the probability of selecting an outside CEO rises with the level of stock ownership of large outside shareholders and the fraction of the board seats held by outsiders. It falls as management entrenchment increases, as firm size increases, and as firm performance improves. Shareholder value increases more with outside than inside CEO selection. Also, more shareholder value is lost the higher the level of ownership by the new CEO relative to the level of ownership by the outgoing CEO, unless the firm has a large outside shareholder. The results are consistent with the view that large outside shareholders play an active role in controlling manager-shareholder conflicts