Determinants of CEO Age at Succession
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Ó Springer 2006
Determinants of CEO Age at Succession WALLACE N. DAVIDSON III1,*, CAROL NEMEC2 and DAN L. WORRELL3 1
Finance Department – Mailcode 4626, Southern Illinois University, Carbondale, IL, 62901, USA (*Author for correspondence, E-mail: [email protected]); 2Business Department, Southern Oregon University, 1250 Siskiyou Blvd, Ashland, OR, 97520, USA; 3Dean, San Walton College of Business, University of Arkansas, Fayetteville, AR 72701, USA
Abstract. Based on Brickley’s (2003) call for research on the CEO/turnover relation, we examine determinants of CEO age at succession. Utilizing the similarity–attraction paradigm, we propose that board members will select new CEOs that are similar to their own age. We find a strong positive relation between successor CEO age and average board member age. Thus, the similarity–attraction paradigm seems to play a role in board of director selection of CEO successors. However, we also propose that poor prior performance may mitigate similarity–attraction. Our results are also consistent with this hypothesis because we find no relation between successor CEO and board age following poor prior performance. Finally, the hiring of an age-similar CEO does not reduce the companies’ subsequent financial performance and may even have a slightly positive impact on it.
1. Introduction In a corporation in which managers and owners are not the same, various mechanisms have developed to help ensure that managers act on behalf of shareholders and thereby mitigate potential agency problems (Fama and Jensen, 1983). One such mechanism is the board of directors. Directors are supposed to serve as the group that represents shareholders’ interests with management. One of the key functions of the board is to hire and fire the top managers in a company, particularly the CEO. There have been numerous studies in the accounting, finance, and management literature on determinants of CEO turnover. The results of these studies have found many explanatory variables, but there seems to be no overall consensus of when and why CEO turnover/succession occurs. After reviewing the turnover/succession literature, Brickley (2003) states ‘‘...I am struck by the limited explanatory power of the various performance measures in the CEO turnover regressions’’ (p. 232). To further develop our understanding of the turnover process, Brickley calls for research in other facets of turnover and argues that ‘‘...the turnover/age relation has the potential to provide important insights on CEO turnover ...’’ (p. 232).
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WALLACE N. DAVIDSON III ET AL.
In this paper, we examine the relation between board demographics such as age and CEO selection. In particular, we propose that attraction theory will help explain CEO choices that boards of directors make. We find that boards tend to hire CEOs whose ages are similar to their own. This result is consistent with the similarity–attraction paradigm. However, we find that similarity–attraction does not explain CEO selection following poor prior performance. Whether or not the org
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