CEO LONGEVITY AND CORPORATE PERFORMANCE: THEORY AND EVIDENCE ON THE BRIGHT AND DARK SIDES OF LEADERSHIP CONTINUITY

This paper develops a theory to study the political economy of CEO longevity by examining how agreement between the board and the CEO over the value-maximizing choice of project-investment action influences the length of CEO tenure and who succeeds the CEO. A key element of the analysis is that the CEO’s entrenchment, rather than being taken as exoge-nously given, is endogenously determined in equilibrium by a tradeoff between the probability of CEO removal and firm value; higher entrenchment diminishes the probability of the CEO being removed and decreases firm value. The bright side of board-CEO agreement is that higher agreement causes the CEO to entrench less, leading to a higher firm value ex ante. However, the dark side of this agreement is that higher agreement also shields the CEO more from being fired upon bad performance ex post. Moreover, CEOs with higher agreement with their boards are more likely to be succeeded by insiders upon their departures. I find strong empirical support for these predictions of my model. This study also casts doubt on the valid-ity of using CEO longevity as an empirical measure for managerial entrenchment, as has been routinely done in the literature