CEO succession planning and

market reactions to CEO turnover announcements

Jihun Bae
Erasmus School of Economics
Erasmus University Rotterdam
bae@ese.eur.nl

Jeong Hwan Jooⱡ

School of Business Administration
Ulsan National Institute of Science and Technology
jeongjoo@unist.ac.kr

Jaeyoon Yu
Erasmus School of Economics
Erasmus University Rotterdam
yu@ese.eur.nl

October 2022

* We are indebted to C. W. Park for his guidance and initial work for this study. We appreciate helpful
comments from seminar participants at the University of Hong Kong and Tilburg University.

ⱡ
Corresponding Author.

Electronic copy available at: https://ssrn.com/abstract=4247809

 CEO succession planning and
market reactions to CEO turnover announcements

Abstract

This study investigates how capital market investors assess CEO succession planning in the
context of CEO turnover events. Conducting empirical tests using a manually collected sample of
676 CEO turnover cases, we find that CEO succession planning mitigates the negative association
between CEO performance and market reactions to CEO turnover announcements. Further
analyses reveal that our results are driven by firms that have strong corporate governance. Overall,
our findings suggest that CEO succession planning disclosure enhances investor confidence in the
continuity of firm performance in the event of CEO turnover.

Key words: CEO turnover, CEO succession planning disclosure, stock market reactions,
corporate governance

JEL codes: G14, G30, G34, M12

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1. Introduction

An important duty for a board of directors is to establish formal, transparent plans for

leadership transition to avoid significant disruptions in business strategy and maintain long-term

viability. Investors are likely to experience uncertainty when they are uninformed about a

successor CEO’s managerial talent, perspective, and business strategy. Nevertheless, many

companies either do not appear to have adequate CEO succession plans or do not communicate

such plans to investors (Larcker & Tayan, 2010; The Rock Center for Corporate Governance,

2010). Other firms disclose their succession planning in proxy statements well before CEO

turnover occurs. Typically, such firms reveal that their boards regularly review a formal CEO

succession plan but do not disclose specific candidates or the succession timeline (Ferris &

O’Brien, 2010).1 Using a CEO turnover setting, we investigate in this study how stock market

investors assess disclosure of CEO succession planning.

It is well documented that CEOs play a critical role in making business decisions and

significantly influence firm performance. For this reason, CEO turnover garners much attention

from capital market investors and academic researchers (e.g., Barros et al. 2022; Haque et al. 2022).

It is intuitive that investors are concerned about an incoming CEO’s abilities, especially when the

outgoing CEO has exhibited superior performance, and in such a case there is a negative relation

between an outgoing CEO’s performance and stock market reactions to the CEO turnover

announcement.

Increasingly, public firms are setting up and disclosing CEO succession plans to avoid

business disruption in case of CEO turnover. While the form of succession planning disclosure is

typically generic (Ferris & O’Brien, 2010), it may at least assure investors of the existence of a

1
Examples include the 2011 proxy statements filed by Lilly Eli & Company and Hewlett-Packard Co. See Appendix
A for these cases.

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formal succession planning process overseen by the board. According to one shareholder activist,

“we are not interested in telling companies who the CEO should be, but we are interested in making

sure that boards are paying attention and they are doing succession planning” (Guerrera & Chung,

2009). Succession planning disclosure, therefore, could boost investors’ confidence that leadership

will be transferred in an orderly manner and without significant disruption to the firm’s operations.

To the extent that succession planning disclosure achieves this, it will mitigate an adverse market

reaction to the resignation of a CEO who has outperformed. Accordingly, we state our hypothesis

as follows:

Hypothesis: CEO succession planning mitigates the negative relation between an outgoing CEO’s

performance and stock market reactions to the firm’s CEO turnover announcement.

To empirically test our hypothesis, we use a novel sample of 676 CEO turnover cases

during the period 2000–2012. For each CEO turnover case, we manually collect its earliest

announcement date and the reason for the CEO’s resignation from Factiva. We also hand-collect

CEO succession planning disclosure from proxy statements. In our sample, 306 (45.3%) disclose

CEO succession planning in the proxy statement preceding CEO turnover announcement. We find

evidence that succession planning disclosure mitigates the negative association between the

departing CEO’s prior performance and the stock market reaction to the CEO’s resignation

announcement, suggesting that succession planning disclosure relieves investors’ uncertainty

about a smooth leadership transition.

We also examine how the strength of corporate governance affects investors’ assessment

of CEO succession planning when the firm announces CEO turnover. We expect that investors

perceive disclosed succession planning to be more informative when the plan has been established

by an effective board of directors and monitored by external stakeholders (Larcker, et al., 2014).

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Using various proxies of strong corporate governance (i.e., 1) higher institutional ownership, 2)

lower CEO ownership, 3) higher board independence, 4) longer tenure of outgoing CEO, and 5)

more analysts following the firm), we show that our main results are more prominent in firms with

stronger corporate governance than otherwise. For further analyses, we classify CEO turnover

cases into two groups: 1) those that announce CEO resignation and successor appointment

simultaneously (hereafter, resignation-appointment cases) and 2) those that announce CEO

resignation without naming an incoming CEO (i.e., resignation-only cases). Our results hold only

for the former, indicating that investors suspect the reliability of the disclosed succession plan in

the resignation-only cases.

Our study is the first to empirically document that capital market investors take into

account the presence of formal CEO succession planning in the event of CEO turnover. In doing

so, it contributes to the growing literature on CEO succession planning (Bills et al., 2017;

McConnell & Qi, 2022); a task considered even more critical since the beginning of the Covid-19

pandemic (Cutter, 2020). We provide evidence that succession planning disclosure is informative

regarding performance continuity for firms announcing CEO transition, complementing a

concurrent study by McConnell and Qi (2022) that examines unconditional stock price changes

surrounding the filing dates of proxy statements that discuss various corporate governance matters,

including CEO succession planning.

Our findings have important practical implications for the transparency of the CEO

succession process. Increasingly, shareholder activists request that firms adopt and disclose a

detailed succession plan that includes the identity of candidates and succession timeline.

Meanwhile, the U.S. Securities and Exchange Commission (SEC) supports the view that

succession planning is an important governance issue, not a day-to-day workforce management

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matter (SEC, 2009). Our evidence suggests that even a generic form of CEO succession planning

disclosure can be informative regarding a firm’s future performance.

2. Research design and sample

2.1. Research design

To test our hypothesis, we estimate the following regression model:

𝐶𝐴𝑅_3𝐷𝐴𝑌𝑆𝑖𝑡 = 𝛼0 + 𝛽1 𝑃𝐸𝑅𝐹𝑖𝑡−1 + 𝛽2 𝑃𝐿𝐴𝑁𝑖𝑡−1 + 𝛽3 𝑃𝐸𝑅𝐹𝑖𝑡−1 ∗ 𝑃𝐿𝐴𝑁𝑖𝑡−1

+𝛽4 𝐻𝐸𝐼𝑅𝑖𝑡−1 + 𝛽5 𝑂𝑈𝑇𝑆𝐼𝐷𝐸𝑅𝑖𝑡 + 𝛽6 𝐴𝐺𝐸𝑖𝑡 + 𝛽7 𝐵𝑀𝑖𝑡−1
+𝛽8 𝐿𝑂𝐺𝑀𝑉𝑖𝑡−1 + 𝛽9 𝑅𝐸𝑆𝐼𝐺_𝑂𝑁𝐿𝑌𝑖𝑡−1 + 𝑒𝑖𝑡 (1)

CAR_3DAYS, our dependent variable, is three-day market-adjusted stock returns (in percentage)

surrounding the CEO turnover announcement date to test our prediction. PERF is size-adjusted

stock returns (in percentage) accumulated over the 12 months ending in the last month of the

quarter immediately before the CEO turnover announcement quarter. PLAN is an indicator variable

that equals one if the firm discloses CEO succession planning in the proxy statement that precedes

the CEO turnover announcement and zero otherwise. Following prior studies (Cannella & Shen

2001; Shen & Canella 2003; Zhang & Rajagopalan 2004; Naveen 2006; Parrino 1997; Tao and

Zhao 2019; Haque et al. 2022), we include the existence of heir-apparent (HEIR), incidence of

outsider new CEO (OUTSIDER), outgoing CEO’s age (AGE), book to market ratio (BM), firm size

(LOGMV) as control variables in equation (1). See Appendix B for detailed definitions of

variables.

Our hypothesis predicts that investors will negatively react to the resignation of an

outperforming CEO and the prior succession planning disclosure will mitigate their concern about

continuity of good firm performance. According to our hypothesis, we expect 𝛽1 , the coefficient

on PERF, to be negative (i.e., an adverse market reaction to the outperforming CEO’s resignation)

and 𝛽3 , the coefficient on the interaction term PERF * PLAN, to be positive (i.e., the mitigating
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effect of knowing the existence of a formal CEO succession plan in place).

2.2. Sample

Our sample starts from non-financial/utility firms that have experienced CEO turnover in

2000–2012. We obtain this initial sample from the ExecuComp database. We then manually collect

the earliest announcement dates of CEO turnover and reasons for CEO resignation from the firms’

press releases or newspaper articles in the Factiva database. For each firm, we check whether the

firm disclosed CEO succession planning in the proxy statement immediately preceding CEO

turnover announcement. 2 If the proxy statement contains “succession”, we read carefully to

determine whether the firm has an explicit CEO succession plan or policy.3 We obtain accounting

and financial data from Compustat and CRSP and corporate governance data from RiskMetrics.

To rule out confounding effects, we exclude observations from our sample if the five-day window

surrounding the turnover announcement date includes news about the firm’s earnings

announcement and management earnings forecasts. In addition, we drop observations if the CEO’s

resignation arises from non-routine reasons such as a scandal, merger, acquisition, policy

difference, dismissal, or “no comment”, because such events may reflect unexpected poor

performance and thus have significant information effects that could confound our inferences.

After requiring non-missing values for variables necessary to test our hypothesis, we are left with

2
We randomly select 102 firm-year observations without CEO succession planning disclosure in proxy statements
and check whether the firms choose annual reports (10-Ks) to disclose CEO succession planning. Only two out of 102
observations disclose that they have executive succession planning, but this planning is not specific to CEO succession.
Because of the rarity and vagueness of succession planning disclosure in annual reports, we use proxy statements as
the primary source of CEO succession planning disclosure.
3
RiskMetrics provides the variable labeled SUCC_COM, which captures the disclosure of CEO succession planning
in a firm’s proxy statement. To check the reliability of the values of this variable, we randomly select 73 observations
out of the CEO turnover sample firms we find from ExecuComp. When SUCC_COM equals one, we find that only
50% of the firms (= 21/42) disclose succession planning. When SUCC_COM equals zero, we find that 61% of the
firms (= 19/31) do not disclose succession planning. The overall misclassification ratio is 45% (= (21+12)/73), which
seems very high. Thus, we do not use the SUCC_COM values in RiskMetrics; instead, we manually collect the
information on CEO succession planning in proxy statements. We also randomly select 30 firms from our sample and
check the values of corporate governance variables from RiskMetrics, which we use in our study. We find these values
generally reliable.

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676 CEO turnover observations.

Table 1 provides the yearly distribution of our sample and how many firms disclosed CEO

succession planning in their most recent proxy statement prior to CEO turnover announcement. Of

our sample, 45.3% (= 306/676) disclosed CEO succession planning in their proxy statements. The

disclosure ratio, as reported in column (4), tends to increase over years, with the largest leap, from

23.21% to 60.0%, occurring in the period 2003 to 2005. This increase follows the adoption of the

Sarbanes-Oxley Act of 2002 and overlaps with the November 4, 2003, NYSE Listing Rules

amendment aimed at strengthening the corporate governance practices of listed companies. Since

CEO succession planning disclosure in proxy statements is not mandated, firms have voluntarily

increased disclosure in this period to serve investors’ heightened interest in corporate governance

policies.

<<Insert Table 1 about here>>

Table 2 describes summary statistics of variables used in our analysis. The mean of three-

day cumulative abnormal returns surrounding the CEO turnover announcements (CAR_3DAYS) is

–0.073%. Departing CEO’s prior performance (PERF) has the mean value of 0.123%. The

proportion of outsider succession (OUTSIDER) is 16.1%. The proportion of firms with heirs

apparent (HEIR) is 42.3% and the mean of the departing CEO’s age (AGE) is 60.126, respectively.

<<Insert Table 2 about here>>

3. Results

3.1. Baseline results

Table 3 reports regression results testing our hypothesis. We observe an adverse market

reaction to the announcement of an outperforming CEO’s resignation without any prior disclosure

of succession planning (i.e., PERF = –0.015, p < 0.05), while the negative association between

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departing CEO’s prior performance and stock market reactions to CEO turnover announcement is

attenuated with the existence of CEO succession planning disclosure (i.e., PERF*PLAN = 0.025,

p < 0.05). According to these results, a leadership change heightens uncertainty over whether good

performance will continue after the outperforming CEO leaves the firm, and the succession

planning disclosure mitigates the investors’ concern about whether the incoming CEO has

inherited the outgoing CEO’s strategies and business skills and will continue his or her good

performance.

<<Insert Table 3 about here>>

3.2. Cross-sectional analyses based on corporate governance mechanisms

To gain further insights into the role of initiating CEO succession planning, we consider

corporate governance mechanisms and examine how they affect the capital market’s assessment

of CEO succession planning. We choose five proxies of strong corporate governance: 1)

institutional ownership, 2) CEO ownership, 3) proportion of independent directors, 4) tenure of

outgoing CEO, and 5) the number of analysts following, respectively. We compare each of these

governance mechanisms with its sample median to decompose our CEO succession planning (i.e.,

PLAN) observations into high and low corporate governance groups (i.e., PLAN_SG and

PLAN_WG). We expect that CEO succession planning functions more effectively when it is

implemented in firms with stronger corporate governance mechanisms (Larcker, et al, 2014). As

reported in Table 4, our main results are generally driven by those with strong corporate

governance mechanisms (i.e., higher institutional ownership, lower CEO ownership, higher board

independence, longer tenure of outgoing CEO, and more analysts following the firm).

<<Insert Table 4 about here>>

3.3. CEO turnover cases with or without an identified incoming new CEO

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 Some companies announce the incoming new CEO and incumbent CEO’s departure

simultaneously (i.e., resignation-appointment cases) and others announce the incumbent CEO’s

departure without identifying an incoming CEO (i.e., resignation-only cases). For resignation-

appointment cases, investors are likely to speculate that a firm has found a suitable successor

through its succession plan and that its prior performance will continue. In contrast, for

resignation-only cases, investors may suspect one of the followings: 1) the previous disclosure of

succession planning was mere show given the lack of evidence of its rigorous implementation; 2)

the firm failed to find a qualified successor, despite its succession planning efforts; and 3) those

cases indicate hidden problems in the outgoing CEO’s performance or characteristics.

We partition our sample into (1) resignation-appointment cases and (2) resignation-only

cases and re-run our analysis separately. We expect that our results will be more prominent for the

former. Panel A of Table 5 presents the sample distribution. For resignation-appointment

(resignation-only) cases, 44.2% (48.7%) disclosed succession planning in their proxy statements

prior to CEO turnover. Panel B of Table 5 reports the regression results of market reactions to

CEO turnover announcements on CEO succession planning for each group. The results reported

in Column (1) (resignation-appointment cases) are similar to our main results in Table 3. In

contrast, the results reported in Column (2) reveal that our main findings do not hold for

resignation-only cases, suggesting that investors view skeptically the disclosed succession

planning of resignation-only firms.

<<Insert Table 5 about here>>

4. Conclusion

This study investigates whether stock market reactions to CEO turnover announcements

vary with prior disclosure of CEO succession planning. We find that CEO succession planning

disclosure mitigates adverse market reactions to outperforming CEOs’ resignation announcements.

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Our findings have important practical implications for the transparency of the CEO succession

process, suggesting that even a generic form of succession planning disclosure can be informative

regarding a firm’s future performance.

Electronic copy available at: https://ssrn.com/abstract=4247809

References

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policy? Finance Research Letters 44: 102085.
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stakeholders’ perceptions of financial reporting risk? Evidence from audit fees. The Accounting
Review 92 (4): 27–52.
Cannella, A. A., & Shen, W. (2001). So close and yet so far: Promotion versus exit for CEO heirs
apparent. Academy of Management Journal 44, 252–270.
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coronavirus-spreads-11585952869.
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planning. The Conference Board, Director Notes.
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Evidence from the Covid-19 pandemic. Finance Research Letters 47: 102609.
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Economics 46(2), 165-197.
Shen, W., & Cannella, A.A. (2003). Will succession planning increase shareholder wealth? Evidence
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Appendix A. Examples of CEO succession planning disclosure in proxy statements

Lilly Eli & Company (Filed on March 7, 2011, Source:

https://www.sec.gov/Archives/edgar/data/59478/000119312511057036/ddef14a.htm)
A key responsibility of the CEO and the board is ensuring that an effective process is in place to
provide continuity of leadership over the long term. Each year, succession-planning reviews are
held at every significant organizational level of the company, culminating in a detailed review of
senior leadership talent by the compensation committee and a summary review by the
independent directors as a whole. During this review, the CEO and the independent directors
discuss future candidates for senior leadership positions, succession timing for those positions,
and development plans for the highest-potential candidates. This process ensures continuity of
leadership over the long term, and it forms the basis on which the company makes ongoing
leadership assignments. It is a key success factor in managing the long planning and investment
lead times of our business.

Hewlett-Packard Co. (Filed on March 23, 2011, Source:

http://www.sec.gov/Archives/edgar/data/47217/000104746911000421/a2201545zdef14a.htm)

Among the Committee's responsibilities as described in its charter is to oversee succession

planning and leadership development. The Board plans for succession of the CEO and annually
reviews senior management selection and succession planning that is undertaken by the
Committee. As part of this process, the independent directors annually review the Committee's
recommendation of candidates for senior management positions to see that qualified candidates
are available for all positions and that development plans are being utilized to strengthen the
skills and qualifications of the candidates. The criteria used when assessing the qualifications of
potential CEO successors include, among others, strategic vision and leadership, operational
excellence, financial management, executive officer leadership development, ability to motivate
employees, and an ability to develop an effective working relationship with the Board.

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Appendix B. Variable definitions

CAR_3DAYS = Three-day market-adjusted stock returns (in percentage) surrounding the

CEO turnover announcement date;
PERF = Size-adjusted stock returns (in percentage) accumulated over the twelve-
month period that ends in the last month of the quarter immediately
before the CEO turnover announcement quarter;
PLAN = An indicator variable that equals one if the firm discloses CEO
succession planning in the proxy statement immediately preceding CEO
turnover announcement and zero otherwise;
HEIR = An indicator variable that equals one if the firm has an heir apparent (i.e.,
an executive who has the title of president or chief operating officer and
who is at least five years younger than the CEO) in the year immediately
before the CEO turnover announcement year and zero otherwise.
OUTSIDER = An indicator variable that equals one if the outside appointment of a new
CEO is reported on the CEO turnover announcement date and zero
otherwise;
AGE = The CEO age in the CEO turnover announcement year;
BM = The ratio of the book value of equity relative to the market value of
equity at the beginning of the CEO turnover announcement quarter;
LOGMV = The natural log of the market value of equity at the beginning of the CEO
turnover announcement quarter;
RESIG_ONLY = An indicator variable that equals one if the firm announces CEO turnover
without naming the new incoming CEO, and zero otherwise;
PLAN_SG = An indicator variable that equals one if CEO succession planning exists
(PLAN_WG) in a strong (weak) corporate governance firm and zero otherwise. A firm
is classified as having strong (weak) corporate governance if
institutional ownership, CEO ownership, the ratio of outside directors,
the outgoing CEO’s tenure, and the number of analysts following are
greater than (lower than or equal to) their sample medians.

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Table 1. Sample distribution
(3)
(1) (2) N (CEO turnover with (4)
Year N (CEO turnover) succession planning) (3) / (2)
2000 66 15 22.73%
2001 34 9 26.47%
2002 52 9 17.31%
2003 56 13 23.21%
2004 68 25 36.76%
2005 55 33 60.00%
2006 52 31 59.62%
2007 48 26 54.17%
2008 57 28 49.12%
2009 47 28 59.57%
2010 40 24 60.00%
2011 58 36 62.07%
2012 43 29 67.44%
Total 676 306 45.27%

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Table 2. Summary statistics (N = 676)
MEAN SD p25 p50 p75
CAR_3DAYS -0.073 5.326 -2.506 -0.239 2.257
PERF 0.123 37.693 -22.114 -4.467 23.026
PLAN 0.453 0.498 0 0 1
HEIR 0.423 0.494 0 0 1
OUTSIDER 0.161 0.368 0 0 0
AGE 60.126 7.001 56 61 64
BM 0.524 0.328 0.286 0.474 0.679
LOGMV 7.686 1.573 6.551 7.496 8.739
See Appendix B for variable definitions.

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Table 3. Regression of stock market reactions to CEO turnover announcement on CEO
succession planning
Dep. Var.=
CAR_3DAYS
PERF -0.015**
(-2.126)
PLAN -0.561
(-1.363)
PERF*PLAN 0.025**
(2.169)
HEIR -0.054
(-0.114)
OUTSIDER 0.417
(0.684)
AGE 0.013
(0.428)
BM -0.554
(-0.791)
LOGMV 0.053
(0.362)
RESIG_ONLY -1.574***
(-2.917)
N 676
Adj. R2 0.018
See Appendix B for variable definitions. All coefficients are estimated using the OLS regression. ***, **,
* indicate statistical significance at the 1%, 5%, and 10% levels for two-tailed tests, respectively.

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Table 4. Cross-sectional analyses using the strength of corporate governance
Dep. Var.= CAR_3DAYS
(1) (2) (3) (4) (5)
Governance measure=
Institutional CEO Board CEO Analyst
ownership ownership independence tenure following
PERF -0.015** -0.015** -0.015** -0.015** -0.015**
(-2.120) (-2.145) (-2.124) (-2.118) (-2.169)
PLAN_SG -0.623 -0.709 -0.528 -0.855* -0.646
(-1.319) (-1.367) (-1.146) (-1.752) (-1.228)
PLAN_WG -0.446 -0.394 -0.658 -0.111 -0.554
(-0.769) (-0.751) (-1.070) (-0.200) (-1.068)
PERF*PLAN_SG 0.024* 0.033** 0.027** 0.028** 0.044***
(1.799) (2.212) (2.151) (1.981) (3.182)
PERF*PLAN_WG 0.026 0.017 0.017 0.018 -0.003
(1.557) (1.162) (0.895) (1.160) (-0.170)
CONTROLS YES YES YES YES YES
N 676 676 676 676 676
Adj. R2 0.015 0.016 0.015 0.017 0.024
See Appendix B for variable definitions. ***, **, * indicate statistical significance at the 1%, 5%, and
10% levels for two-tailed tests, respectively.

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Table 5. Resignation–appointment cases vs Resignation only cases
Panel A. Sample distribution
Types of CEO turnover PLAN =0 PLAN = 1 Total
Resignation–appointment cases 288 (55.8%) 228(44.2%) 516 (100%)
Resignation only cases 82 (51.3%) 78 (48.7%) 160 (100%)
Total 370 (54.7%) 306 (45.3%) 676 (100%)

Panel B. Regression results

Dep. Var.= CAR_3DAYS
(1) (2)
Resignation-appointment Resignation-only
sample sample
***
PERF -0.022 0.001
(-2.900) (0.086)
PLAN -0.800* 0.093
(-1.796) (0.091)
PERF*PLAN 0.027** 0.020
(2.164) (0.764)
CONTROLS YES YES
N 516 160
Adj. R2 0.011 -0.016
See Appendix B for variable definitions. ***, **, * indicate statistical significance at the 1%, 5%, and
10% levels for two-tailed tests, respectively.

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