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Organizational Complexity and Succession Planning

Published online by Cambridge University Press:  06 April 2009

Lalitha Naveen
Lalitha Naveen
Affiliation:
lalitha@gsu.edu, Department of Finance, J. Mack Robinson School of Business, Georgia State University, 35 Broad Street, Atlanta, GA 30303.
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Abstract

This study uses a large sample of firms to examine how human capital considerations affect the process of CEO succession. Costs and benefits of succession planning are affected by a firm's level of operational complexity and human capital requirements; firms that are more complex incur greater costs to transferring firm-specific knowledge and expertise to an outsider, and should be more likely to groom an internal candidate for the CEO position. Consistent with this, I find that a firm's propensity to groom an internal candidate for the CEO position is related to firm size, degree of diversification, and industry structure. My results also suggest that succession planning is associated with a higher probability of inside succession and voluntary succession and a lower probability of forced succession. I also provide evidence that horizon problems are mitigated to some extent by having a succession plan.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 41 , Issue 3 , September 2006 , pp. 661 - 683
Copyright
Copyright © School of Business Administration, University of Washington 2006

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