Vincent J. Intintoli

The Effects of Succession Choice Surrounding CEO Turnover Announcements: Evidence from Marathon Successions

This study examines marathon successions, which I define as top executive searches that are extended past the formal departure notice of the incumbent chief executive officer (CEO). Marathons should be used when search costs are high and when little time passes from when the incumbent steps down to when they leave the firm. Consistent with these predictions, marathons primarily follow surprise departures and forced turnovers. Marathons are also likely for firms operating in heterogeneous industries that face early tenure incumbent departures. These findings shed light on an increasingly prevalent form of succession and provide insight into the rationale and implications behind the announcement.

The Impact of CEO Turnover on Firm Performance around Interim Successions

Prior research reports that financial performance of firms that hire interim CEO successors is worse following interim CEO appointments than those that hire permanent successors. We find that this underperformance occurs only following voluntary turnover interim appointments, which represent a small fraction of all voluntary turnovers and roughly a quarter of all interim appointments. We do not observe poor performance when boards hire interim successors following instances of forced departure. Further analysis shows that poor performance during voluntary turnover interim successions are limited to using operating performance measures; market performance is not significantly worse following interim successions. Our results indicate that many interim appointments should not be viewed as value decreasing endeavors and future research on post-succession financial performance should consider the circumstances surrounding the turnover of the predecessor.

Board Connectedness and Board Effectiveness

We examine the effect of the social connectedness of independent, non-co-opted directors on their ability to monitor and advise the firm. We begin by providing evidence that well-connected directors have greater protection from career concerns. We next examine the channels by which director connectedness may improve monitoring and find that audit committee connectedness has a positive effect on the quality of financial reporting. Further, better connected compensation committees are less likely to overpay the CEO. Finally, we examine the effect of well-connected directors on the firm’s information environment. We show that firms with highly connected boards have lower financing costs and higher payout ratios. We also find that better connected boards are better able to shield the firm from the negative impact of a competition shock. Our results are robust to multiple approaches to mitigate endogeneity. Overall, well-connected boards appear to be effective in promoting shareholders’ interests.

The Effect of Demand for Shares on the Timing and Underpricing of Seasoned Equity Offers

type=main> Despite high levels of asymmetry of information, firms that issue seasoned equity offerings (SEOs) within a year of their initial public offering (IPO) (follow-on SEOs) are able to offer shares at a lower discount as compared to more mature firms. We provide evidence that this seeming contradiction can be explained by a very high degree of demand for the follow-on offering. We find that the likelihood of issuing a follow-on SEO is significantly related to the level of institutional demand and that discounts are lower for follow-on SEOs in which institutional demand is high. We also consider the joint effect of cash holdings and follow-on SEOs on discounts since firms that have recently gone public tend to hold high levels of cash. Underpricing is higher for firms with elevated preoffer levels of cash, which is consistent with market timing predictions. However, this relation is mitigated for both follow-on SEOs and issues that also have high share demand.

CEO Turnovers and Disruptions in Customer-Supplier Relationships

Events that disrupt customer-supplier relationships pose a source of risk for suppliers that depend on a customer for a large portion of their revenues. We identify the replacement of a customer’s CEO as a disruptive event that results in suppliers losing substantial sales to the customer following the turnover. This loss is greater when incumbents are more likely to be entrenched. Suppliers also experience declines in overall financial performance following this loss in sales as well as negative abnormal stock returns to announcements of customer CEO departures. Our findings suggest that these disruptions largely stem from successors divesting assets.

Director Connectedness: Monitoring Efficacy and Career Prospects

We examine the effect of social connectedness of independent, non-co-opted audit committee directors, focusing on their ability to prevent corporate misconduct. We posit that directors with greater connectedness in the social network are better shielded from career concerns, suggesting that they have greater incentives to monitor. We find that 1) conditional on detected misconduct, well-connected directors have greater protection from labor market repercussions than less-connected directors; 2) audit committee connectedness has a positive effect on the quality of financial reporting; and 3) market reactions to the sudden loss of a highly connected director is significantly more negative than for less connected directors. Our results are robust to multiple approaches to mitigate endogeneity. Overall, well-connected boards appear to be effective in promoting shareholders’ interests.

CEO Turnover, Information Uncertainty, and Debt Contracting

CEO turnovers are important corporate events that can lead to significant changes within the firm. We find that CEO departures are associated with a subsequent increase in bank loan financing. The negative effect that CEO departures have on borrowing costs is largely driven by forced CEO turnovers. Following such departures, firms pay higher loan spreads, see an increase in covenants, and are more likely to be subject to collateral requirements, when compared to matched non-turnover and voluntary turnover firms. Evidence suggests that asset substitution and changes in accounting information quality help to explain the observed worsened terms following forced dismissals. On the other hand, more traditional voluntary departures are unrelated to changes in price and non-price loan terms.

Cash Holdings and CEO Turnover

Chief Executive Officer (CEO) characteristics, such as the level of risk aversion, are known to affect corporate financial policies, and therefore are likely to impact corporate liquidity decisions. We examine changes in cash holdings around CEO turnover events, a period in which discrete changes in managerial preferences and abilities are likely to have the most dramatic effect on cash holdings. Our results suggest that cash holdings increase significantly following forced departures. The increase is persistent over the successor’s tenure and is robust to controls for the standard firm-level determinants of cash holdings and corporate governance characteristics. We find that higher cash holdings arise mainly through the management of net working capital, as opposed to asset sales or reductions in investment. This suggests that the changes are optimal for shareholders rather than an indication of serious agency problems. This conclusion is supported further by our finding that the marginal value of cash does not decrease following the turnover.