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Top management team turnover, CEO succession type, and strategic change

Top management team turnover, CEO succession type, and strategic change
Top management team turnover, CEO succession type, and strategic change

Top management team turnover,CEO succession type,and strategic change

John M.Barron a ,Dmitriy V.Chulkov b ,?,Glen R.Waddell c

a Department of Economics,Purdue University,West Lafayette,IN 47907-1310,United States

b School of Business,Indiana University Kokomo,Kokomo,IN 46904-9003,United States

c

Department of Economics,University of Oregon,Eugene,OR 97403-1285,United States and IZA Bonn,Germany

a b s t r a c t

a r t i c l e i n f o Article history:

Received 3April 2009

Accepted 1September 2010

Available online 28September 2010Keywords:

Executive turnover

Top management teams Strategic change

Discontinued operations Power circulation theory

While previous research suggests that CEO turnover correlates with strategic changes in ?rm's operations such as discontinuation of operations,we demonstrate that such ?ndings apply only to speci ?c types of CEO turnover,and only if non-CEO members of the top management team also exit the ?rm.Our analysis examines cases of contender,follower,and outsider succession and reinforces the key role of non-CEO departures in strategic change at a ?rm.The results support an integration of the upper echelons perspective and the power circulation theory view of top management team turnover.

?2010Elsevier Inc.All rights reserved.

1.Introduction

Research on top management teams (TMTs)recognizes that senior executives rarely work alone.The upper echelons perspective (Hambrick and Mason,1984)argues that collective characteristics and actions of the TMT may affect organizational outcomes.However,studies of executive turnover in economics and ?nance typically pay exclusive attention to the CEO and ?rm performance measures (e.g.Murphy and Zimmerman,1993;Warner et al.,1988;Pourciau,1993;Huson et al.,2004).Less research in this literature focuses on strategic changes at the ?rm coinciding with CEO turnover.In one example,Weisbach (1995)explores the extent to which CEO turnover correlates with the divestitures of recently acquired divisions and concludes that the probability of exiting a line of business and divesting unsuccessful acquisitions is signi ?cantly higher with the dismissal of the CEO responsible for the acquisition.

In order to complement the research on strategic changes at the time of top management turnover,our analysis exploits a large representative dataset that allows us to better identify the speci ?c types of CEO turnover that correlate with changes at the ?rm,including joint turnover of the CEO and non-CEO members of the TMT.We use the accounting disclosure of discontinued operations –exiting a line of business –as a measure of strategic change in ?rm operations.Such a variable has been used previously in studies of escalation in managerial decisions (Statman and Sepe,1989)and is similar in ?avor to the variable considered by Weisbach (1995).Our analysis helps

reveal a more focused relationship than has been previously documented.

Shen and Cannella (2002)adapt the power circulation theory of control (Ocasio,1994;Ocasio and Kim,1999)to the discussion of TMT turnover.In this view,there are three distinct types of CEO turnover —outsider succession,follower succession that includes insider CEO replacement appointed after a retirement of the outgoing CEO,and contender succession that includes insider successors appointed after the resignation of the outgoing CEO.Shen and Cannella demonstrate that these three types of succession have different effects on the subsequent operational performance of the ?rm.We complement this strand of research by exploring a more precise measure of strategic change in the operations of ?rms affected by the three types of CEO succession.We also integrate the three types of turnover suggested by Shen and Cannella with the upper echelons perspective by examining TMT turnover scenarios at the time of CEO succession.Our analysis leads to three signi ?cant ?ndings.

Our ?rst ?nding is that CEO departure from the ?rm is associated with reporting of discontinued operations only if other top executives also exit the ?rm.Note that limiting the analysis to only cases of CEO turnover was common in earlier empirical studies in the ?nance and economics literature (e.g.Weisbach,1995;Huson et al.,2004).We replicate the basic ?nding of Weisbach that CEO turnover is correlated with changes in the ?rm's operations.In further analysis,we allow estimates to differ in cases of joint turnover by the CEO and other top managers and in cases when the CEO leaves alone.Doing so demonstrates that the basic result re ?ects a large and signi ?cant link between discontinued operations and CEO departures that also involve departures of other TMT members.This ?nding supports the upper echelons perspective and questions the merit of theorizing

Journal of Business Research 64(2011)904–910

?Corresponding author.Tel.:+17654559282.

E-mail addresses:barron@https://www.sodocs.net/doc/ea15895978.html, (J.M.Barron),dchulkov@https://www.sodocs.net/doc/ea15895978.html, (D.V.Chulkov),waddell@https://www.sodocs.net/doc/ea15895978.html, (G.R.

Waddell).

0148-2963/$–see front matter ?2010Elsevier Inc.All rights reserved.doi:

10.1016/j.jbusres.2010.09.004

Contents lists available at ScienceDirect

Journal of Business Research

about the events surrounding CEO turnover separately from those that relate to the turnover of other members of the TMT.

Second,we?nd that a signi?cant relationship between CEO turnover and discontinued operations exists in cases of contender succession,but not follower succession.This result supports the application of power circulation theory to the analysis of TMT turnover and suggests that contender succession and a mandate for strategic re-orientation of the?rm coincide.Our third result is that in cases of outsider succession,a higher likelihood of discontinuing operations only occurs if outsider succession coincides with the departure of other TMT executives.In cases when outsider succession does not involve turnover in the TMT,or in cases when the outgoing CEO stayed with the?rm in another capacity,we?nd no signi?cant relationship.Karaevli(2007)summarizes con?icting?ndings of over ?fty studies on outsider succession and recommends better measure-ment of turnover context.We complement the literature on outsider succession by demonstrating the need for integration of outsider succession studies with the upper echelons perspective.In our extensive sample,the apparent signi?cant relationship between outsider succession and change at the?rm is driven by the cases when outsider succession also involves departure of non-CEO top managers from the?rm.

2.Background and hypotheses

Our analysis complements two distinct strands of research.One such strand,arising in?nance and economics,considers changes at the?rm that coincide with CEO turnover.For example,CEO turnover has been linked to stock-price movements(e.g.,Warner et al.,1988) and changes in accounting variables(Murphy and Zimmerman,1993; Pourciau,1993).Less work has focused on the strategic changes at the ?rm accompanying such movements.An exception noted above is the Weisbach(1995)study of the link between CEO changes and divestitures of recently acquired divisions.

The above turnover studies focused solely on the CEO.However,an emerging literature on the patterns of non-CEO top manager turnover documents that non-CEO departures from the?rm are frequent events at the time of CEO departure.Fee and Hadlock(2004)report that the probability of non-CEO turnover increases when the CEO exits the?rm.Hayes et al.(2006)?nd that the probability of non-CEO turnover increases around times of CEO turnover,which may be explained by complementarities among members of the TMT.We extend this research by detailing the patterns of CEO and non-CEO turnover for an extensive dataset of?rms and exploring the speci?c types of turnover that coincide with strategic change at?rms.

In contrast to the studies in economics and?nance,management literature has long held the view that strategic choices and performance are in?uenced not only by the CEO,but also by non-CEO members of the TMT(e.g.,Hambrick and Mason,1984;Carpenter et al.,2004).The“upper echelons perspective”suggests that observed characteristics of the TMT may serve as reasonable proxies for the unobserved differences in cognition and values that are related to strategic outcomes.A number of studies have shown that character-istics of the TMT play an important role for changes in the?rm's strategy.For instance,Wiersema and Bantel(1992)report that?rms are more likely to experience a change in strategy if they exhibit TMTs with shorter organizational tenure and lower average age,while Finkelstein and Hambrick(1990)report that long-tenured TMTs are associated with strategic persistence.Boeker(1997)demonstrates that turnover of individual members of the TMT in an18-year sample of observations from the semiconductor industry is associated with the strategic action of new product entry.Beckman et al.(2007) indicate that in a sample of161technology?rms,entry of new members into the TMT increases the likelihood that a?rm achieves an IPO,while TMT exits reduce the likelihood of achieving an IPO. Carpenter et al.(2004)provide a comprehensive review of the theoretical and empirical developments in the related literature.More recent empirical studies explored the impact of TMT characteristics such as gender composition(Krishnan and Park,2005),power distribution(Smith et al.,2006),and pay dispersion(Ensley et al., 2007).

In this study,we extend the research on TMT turnover by examining coincident strategic change in the?rm's operations as measured by new disclosures of discontinued operations.Such disclosures indicate strategic re-orientation at the?rm.Adopting this measure of strategic change allows for the creation of a large multi-industry dataset that complements earlier small-sample studies by considering various turnover scenarios.

Studies of turnover in the TMT also explore succession processes and their impact on the relationships among top executives.These studies include research on heirs apparent,de?ned as insiders who may be in line to replace the CEO(Vancil,1987).Such heirs are often identi?ed by the title of president or chief operating of?cer(Cannella and Shen,2001).The?ndings in this area include Bigley and Wiersema(2002)demonstration that the heir apparent status carries consequences for strategic decision-making,including the tendency to undertake corporate strategic refocusing after the heir's promotion to CEO.

The power circulation theory of control(Ocasio,1994;Ocasio and Kim,1999)focuses on power contests at the?rm initiated by non-CEO senior executives as well as by outside directors and suggests that an insider succession may be the outcome of a power contest.In this case, the inside successor is more likely to have a mandate for strategic change.Shen and Cannella(2002)refer to such successors as “contenders”.In contrast,insider successors that follow an ordinary retirement are likely to have the mandate to maintain strategic continuity(Friedman and Olk,1995).The extensive dataset that we employ allows us to identify cases of contender and follower successions.We anticipate contender succession to be associated with strategic re-orientation and follower successions to have no such association.

Hypothesis 1.CEO departure in a contender succession will be positively associated with discontinued operations reported by the ?rm.

Hypothesis2.CEO departure in a follower succession will not be associated with discontinued operations reported by the?rm.

In contrast with insider succession,outsider succession is more likely in periods of poor?rm performance and may indicate the absence of competent talent inside the?rm(Finkelstein and Hambrick,1996).Outsider successors may have the mandate to change the direction of the?rm,but the lack of?rm-speci?c knowledge and the resistance of the remaining TMT members put outsiders at a disadvantage as Shen and Cannella(2002)?nd a strong negative impact of outsider succession on post-succession operational performance.Zhang and Rajagopalan(2010)present evidence that outsider succession has a complex non-linear relationship with?rm performance.In order to further focus on the differences between outsider,contender,and follower succession,we identify turnover scenarios that include the entire TMT.The upper echelons perspective suggests that change in the TMT may be a key indicator of strategic change at the?rm.Empirically,Mueller and Barker(1997)report that ?rms that experience a turnaround are more likely to exhibit turnover in the TMT.Shen and Cannella(2002)conclude that focusing on the CEO alone“cannot fully capture the performance consequences of CEO succession”.Thus,we consider the following hypothesis suggested by the upper echelons perspective:

Hypothesis3.Joint turnover of the CEO and non-CEO members of the TMT will be associated with discontinued operations reported by the ?rm.

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The context of CEO succession in?uences the TMT turnover,as follower successions re?ect a well-planned succession process (Vancil,1987),while contender successions indicate a mandate for change that may provide for TMT restructuring.Those executives not suited to the new strategies leave the?rm(Shen and Cannella,2002). Our?nal set of hypotheses complements the work of Shen and Cannella(2002)by looking at non-CEO turnover at the time of CEO succession.We attempt to integrate the power circulation theory and the upper echelons perspective,and explore the correlation between strategic change at the?rm and the different scenarios of turnover in the TMT and CEO succession.We expect a positive correlation between TMT turnover and discontinued operations in contender successions,and no such correlation in follower successions.

In outsider successions,we expect the re-orientation at the?rm to occur only if the prior CEO and other TMT members leave the?rm. While Shen and Cannella(2002)explore all outsider successions jointly,we are able to separate cases of outsider successions that involve the former CEO staying with the?rm in another capacity from cases that involve no departures in the former TMT.The mandate for change mentioned in the literature on outsider succession is more likely to be observed if the prior CEO leaves the?rm,and less likely if the prior management team stays at the?rm beyond a transitional period.

Hypothesis4.Joint turnover of the CEO and non-CEO members of the TMT at the time of contender succession will be associated with discontinued operations reported by the?rm.

Hypothesis5.Joint turnover of the CEO and non-CEO members of the TMT at the time of follower succession will not be associated with discontinued operations reported by the?rm.

Hypothesis6.Joint turnover of the CEO and non-CEO members of the TMT at the time of outsider succession will be associated with discontinued operations reported by the?rm.

3.Data and sample selection

The analysis starts with the Standard and Poor's ExecuComp dataset of top executives for the period from1992through2006.With 2664publicly traded?rms in the sample,the panel of observations amounts to a total of23,747?rm-year observations.The ExecuComp dataset records detailed characteristics of executive compensation contracts allowing for the separate identi?cation of the cases of CEO and non-CEO turnover.Barron and Waddell(2003)present a general discussion of the ExecuComp data.

3.1.Identifying the CEO

While the ExecuComp dataset typically identi?es each?rm's Chief Executive Of?cer(CEO),this information can be missing.We therefore supplemented the ExecuComp database in two ways.First, we integrated the LexisNexis Corporate Af?liations database of top executives with ExecuComp.Second,we searched historical sources contained in Dow Jones and Reuters'Factiva full-text news dataset in order to con?rm the executive's identity in cases when the data were missing or con?icting.In total,over1600separate inquires were made to verify and supplement the CEO identi?cation from ExecuComp and Corporate Af?liations data sources.

We were careful throughout to establish the identity of the CEO and the exact timing of succession.In cases when con?icting database information indicated a succession process that was not clear-cut,at least two researchers examined the newswire descriptions of the succession and found agreement on the exact timing of succession and CEO identi?cation in each year.This resulted in over300 adjustments to CEO identi?cation.Most of these changes corrected the reported timing of succession.In several cases we needed to correct the CEO designation,as co-CEOs were reported in a transition period.In another case,we excluded from the sample2years of data for Lucent Technologies,as this company was not spun off from ATT and had no separate CEO until1996,although it appears in the ExecuComp database prior to1996as a separate company.In general, we performed multiple checks to assure overall accuracy.For example,our consistency checks revealed that the unique identi?er assigned to executives in ExecuComp can change when an executive's surname changes due to marriage.A full list of adjustments to the ExecuComp data is available from the authors.

3.2.Identifying turnover scenarios

“CEO turnover”is typically de?ned in the literature as departure from the of?cial position of CEO and not necessarily the?rm.However, a departure can often involve the individual taking a new position within the?rm(e.g.,Chairman of the Board of Directors)or maintaining a past position(e.g.,Chairman would again be typical). One distinguishing feature of our analysis is that we separately identify CEO turnover that re?ects an individual who actually leaves the?rm from that which constitutes a change in responsibility within the?rm. In essence,our expectation is that the CEO's retention within the ?rm contains information.We therefore consider how variation in the observed turnover patterns across?rms–a true departure for some CEOs versus a change of duties for others–is connected to disclosures of discontinued operations.

The ExecuComp data provides reasons for CEO departure classi?ed as one of the three types—retired,resigned,or deceased.We supplemented this information through detailed searches of business publications using the Dow Jones and Reuters'Factiva full-text news database.The collected data helped clarify the unknown and missing cases,identify cases of departure due to death or illness,and separate interim CEOs from others.We removed from our analysis turnover activity involving interim CEOs that constituted about two hundred cases of turnover(1%of all?rm-year observations).As individuals leaving the?rm from the CEO position often have a short period of transition that we want to allow for,we made the assumption that outgoing CEOs left the of?ce and the?rm if they are not found in the ?rm's record of top executives in the second year following their last year in the CEO position.That is,we allow for up to1year of transi-tional employment before making the determination that the exec-utive stayed with the?rm.

Our analysis is also distinguished by including turnover patterns of non-CEO members of the TMT.Once the CEO was identi?ed,we used total compensation to determine the top three non-CEO executives.A similar mechanism is employed by Fee and Hadlock(2004)and Hayes et al.(2006).For each of these non-CEO executives,we assume that if he or she is not among the?rm's list of top executives the following year,the executive departed the?rm.A limitation of the dataset is that for executives below the CEO,it could be the case that exclusion from the set of top-four managers in a given year re?ects only a change in ordinal compensation,but not necessarily a departure from the?rm.In order to provide accommodation for this issue,we compare each executive not only to the top-four,but to the entire list of the?rm's executives in the dataset in the subsequent year to determine turnover.This entire list of executives typically includes at least?ve executives for each?rm,but may have as many as eleven top executives.In addition,we performed over1600individual inquiries on the details of turnover for both CEO and non-CEO executives.Our experience indicates that senior executives that drop off the list for a particular?rm are in fact leaving senior positions.

The de?nition of the top-four executives as the size of the TMT in our study is dictated by the availability of the data in the ExecuComp database.This approach is common in studies that rely on?nancial statements as a source of data.For instance,Carpenter et al.(2003)

906J.M.Barron et al./Journal of Business Research64(2011)904–910

and Carpenter et al.(2001)constrain the de ?nition of the TMT to the top ?ve highest paid executives including the CEO as listed in the ?nancial statements,while Bertrand and Schoar (2003)use the top ?ve executives reported in the ExecuComp .Other studies reported similar mean TMT size using publicly available sources,including Wiersma and Bantel (1992)with mean TMT size of 4.3or Haleblian and Finkelstein (1993)with 3.39.Surveys of top managers yielded mean TMT sizes reported by Amason (1996)–3.45,Iaquinto and Fredrickson (1997)–4.2,Amason and Mooney (1999)–4.9.An extensive list of TMT sizes is provided in Carpenter et al.(2004).In general,our de ?nition of the TMT size is in line with these existing studies,especially the ones that rely on ?nancial statements.3.3.Identifying discontinued operations

In analyzing the effects of CEO turnover,Murphy and Zimmerman (1993)consider changes in R&D,advertising,capital expenditures,and accounting accruals,while Weisbach (1995)looks at 282reported divestitures of previous acquisitions.Our proxy for a real change in a ?rm's portfolio of operations is the disclosure of discontinued operations,which is de ?ned by FASB Statement No.144as “the results of operations of a component of an entity that either has been disposed of or is classi ?ed as held for sale ”.Note that prior to 2001,the guidance for reporting discontinued operations was provided by the 1973APB Opinion No.30that de ?ned a discontinued operation as a separate line of business or a separate class of customer.The change in the de ?nition of discontinued operations can be viewed as introducing noise into our dependent variable,and our empirical ?ndings are consistent and stronger if the sample is restricted to years before this 2001change in the accounting standard of discontinued operations.

In order to obtain a measure of discontinued operations,we match each ?rm in our ExecuComp sample to Compustat records in which annual data item number 66represents “the total of income (loss)from operations of the discontinued division and the gain (loss)on the disposal of the division ”.Our dependent variable is binary and equals one for each year that the ?rm disclosed a new sequence of discontinued operations,as our analysis focuses on the fact that discontinuations were announced,and not on speci ?c amounts.This approach is consistent with that of Statman and Sepe (1989).While

sharing the spirit of the divestiture measure adopted in Weisbach (1995),we are knowingly trading a somewhat less-precise measure of change in the ?rm's portfolio of operations for the advantage of having a measure that is available for a larger and more-general collection of ?rms,which is necessary to separately examine a variety of turnover scenarios.As the ?nancial implications of discontinued operations are commonly spread over multiple annual reports,we focus on the ?rst disclosure of discontinued operations in each sequence.In summary,the dependent variable in the empirical results reported below is equal to 1if the ?rm discloses a new sequence of discontinued operations in a year,and 0otherwise.

We adopt the ExecuComp dataset as our initial sample of ?rms.We limit our sample to those cases where we have information on compensation for at least four top executives each year and for a minimum of three consecutive years in order to de ?ne turnover.In our empirical speci ?cations,we also control for variation in ?rm characteristics that are likely to correlate with discontinuation of operations.In addition,we include measures of ?rm performance such as the industry-adjusted shareholder rate of return on equity over the prior one and three-year periods as well as industry-adjusted net income to assets ratio,anticipating that poor-performing ?rms may behave differently.Given this list of controls,missing information on one or more of these variables yields a ?nal sample of 2399unique ?rms and 17,313?rm-year observations from 1993to 2005.4.Empirical results

Examination of the raw departure patterns suggests why a formal analysis that exploits larger samples is useful in identifying alternative types of TMT turnover.Table 1identi ?es top-executive departure types for the full sample.We identify insider replacement if the new CEO was among the top executives at the ?rm for at least two years prior to assuming the CEO position.Doing so excludes cases when an outsider is initially brought in below the CEO for a transition period.Following the power circulation theory (Shen and Cannella,2002),we separate the insider succession into cases of contender and follower succession.We de ?ne follower succession as insider succession when the prior CEO changes duty and stays with the ?rm in another

Table 1

Executive turnover by type (1993–2005).

Reported number of cases based on a sample that excludes observations with missing data.This sample matches the full sample used in Model (6)in Table 4except that the 45cases when the CEO

left due to death or illness are excluded.The percentages are with respect to each row.

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capacity,or retires.Contender succession is de ?ned as insider succession when the outgoing CEO leaves the ?rm for reasons other than retirement,death,or illness.

Shen and Cannella (2002)view contender successors as having the mandate for change and follower successors as having the mandate to keep status quo,while all outsider succession is explored jointly.Our data suggest that cases of outsider succession may also be distin-guished by the likely mandate of the incoming CEO.In 340cases out of 649outsider successions,the prior CEO stayed with the ?rm after leaving the position.Similar to follower succession,the mandate for

change is unlikely if the prior CEO stays with the ?rm beyond a transitional period.We expect such a mandate only in cases when the prior CEO left the ?rm for reasons other than regular retirement or illness.

Table 1also reports whether turnover in the TMT occurred at the time of CEO succession.The table lists whether at least one of the non-CEO TMT members left the ?rm at the time of the CEO succession.Note that turnover in non-CEO members of the TMT is relatively more common in cases of contender succession and outsider succession with mandate for change.

4.1.Discontinuations and CEO turnover:a ?xed-effects analysis In order to focus on the link between CEO turnover of various types and new disclosures of discontinued operations,our speci ?cation includes ?rm-level ?xed effects which allows us to abstract from differences across ?rms that could be correlated with both turnover and the likelihood of discontinued operations.For such analysis,there are 8096observations across 857?rms that experienced at least one incident of discontinued operations.For comparison,we also report cross-sectional analysis for the full panel in a later table.

The ?xed-effects logit estimates reported in Table 2examine the relationship between strictly prior (Model 1),concurrent (Model 2),and strictly subsequent (Model 3)CEO turnover and new disclosures of discontinued operations.While we remain careful not to unjusti-?ably make causal statements,the collective impact of the patterns identi ?ed across the three speci ?cations suggests that to the extent discontinued operations and turnover co-vary,the signi ?cance of any patterns is con ?ned to within-year episodes.The results suggest that discontinued operations and CEO turnover vary together and with an apparent short-lived relationship.This positive result complements Weisbach's (1995)?nding that divestitures are more likely with the change in CEO.

Focusing on contemporaneous movement in turnover and disclo-sure of discontinued operations,Tables 3and 4examine further the sources of the underlying link between CEO turnover and discon-tinued operations.Table 3provides a version of Table 1that illustrates the differences in the likelihood of discontinued operations depending on turnover type.The striking feature of Tables 3and 4is that the

Table 2

Likelihood of discontinued operations and CEO turnover.

Reported coef ?cients are based on estimates of ?xed-effects logit speci ?cations.Robust standard errors are reported in parentheses.The mean value of the dependent variable is 0.143.

Discontinued

operations in

subsequent year Discontinued operations in concurrent year Discontinued operations in prior year Model (1)

Model (2)Model (3)CEO left position

?0.0070.31???0.01(0.11)(0.10)(0.10)Only non-CEO TMT turnover 0.050.120.05(0.07)(0.07)(0.07)Prior 1-year industry-adj.shareholder rate of return 0.00030.00020.0003(0.0017)(0.0017)(0.0017)Prior 3-year industry-adj.shareholder rate of return ?0.11?0.12?0.11(0.21)(0.21)(0.21)Prior https://www.sodocs.net/doc/ea15895978.html, income divided by total assets

0.070.080.07(0.16)(0.16)(0.16)Prior log of book value of total assets

0.77??0.76??0.77??(0.10)(0.10)(0.10)Prior ratio:R&D to book-value to assets

1.58 1.61 1.58(0.94)(0.94)(0.94)Prior ratio:market to book-value of assets

?0.20???0.19???0.20??(0.07)(0.06)(0.07)Prior log of CEO tenure 0.070.040.07(0.05)(0.05)(0.05)Observations

8096

8096

8096

Not reported are coef ?cients on twelve year-indicator variables.?Signi ?cant at 5%.??Signi ?cant at 1%.

Table 3

Percent of cases of discontinued operations across different types of CEO Turnover.

Reported percentages re ?ects the ?xed-effects sample of ?rms used in Tables 2and 4.The bold type indicates a cell that had a statistically signi ?cant (at the 1%level)higher likelihood

of discontinued operations.

908J.M.Barron et al./Journal of Business Research 64(2011)904–910

greater likelihood of discontinued operations in the raw data for CEO departures is traceable to a speci ?c subset of CEO turnover,namely contender succession when other TMT members also leave the ?rm,or outsider succession when there is a mandate for change as indicated by the departure of the prior CEO and one or more of the prior TMT members from the ?rm.This path is highlighted using bold lettering in Table 3.

Table 4con ?rms the statistical signi ?cance of this pattern.Model (2)is repeated in the ?rst column of Table 4as the baseline speci ?cation.Models (4)and (5)then break down CEO turnover further.In Model (4)we allow estimates to differ in cases of contender and follower succession,and in cases of outsider succession with and without a mandate for change.Doing so demonstrates that the result reported in Model (2),one that is repeated in the literature,re ?ects a large and signi ?cant effect associated with contender succession and with outsider succession when the departing CEO leaves the ?rm.

There is no signi ?cance,and the coef ?cients are close to zero in cases of follower succession and outsider succession associated with regular retirements.Thus,the results from Model (4)support Hypotheses 1and 2.

4.2.Discontinuations and top management teams

Taking into account the departure behavior of non-CEO top executives,Model (5)introduces separate estimated coef ?cients for CEO departures that are accompanied by at least one other TMT member leaving the ?rm and those made alone.The empirical regularity identi ?ed in this speci ?cation strongly suggests a team effect in the correlation between CEO departures and discontinued operations.In fact,in cases when the CEO was the only top manager to leave position there is no statistically signi ?cant relationship within the data.Furthermore,this insigni ?cance is observed for all the

Table 4

Likelihood of discontinued operations and CEO turnover type.

Reported coef ?cients are based on ?xed-effects logit speci ?cations for ?rms with at least one discontinued operation during the period,except model (6)which is a logit speci ?cation for the full panel sample.Robust standard errors are reported in parentheses.The dependent variable mean is 0.14for the ?xed-effects sample and 0.07for the full sample.

Discontinued operations Model (2)

Model (4)

Model (5)

Model (6)

CEO left position

0.31??(0.10)

CEO left ?rm,contender successor

0.46?(0.22)

CEO left ?rm,contender successor,no TMT turnover 0.210.27(0.33)(0.30)CEO left ?rm,contender successor,TMT turnover 0.67?0.96??(0.29)

(0.26)

CEO changed duty or retired,follower successor

0.14(0.15)

CEO changed duty or retired,follower successor,no TMT turnover ?0.030.07(0.19)(0.18)CEO changed duty or retired,follower successor,TMT turnover 0.390.49?(0.22)

(0.20)

CEO left ?rm,outsider successor

0.65??(0.20)CEO left ?rm,outsider successor,no TMT turnover ?0.08?0.07(0.46)(0.43)CEO left ?rm,outsider successor,TMT turnover 0.85?? 1.00??(0.22)(0.19)

CEO changed duty or retired,outsider successor

0.24(0.22)

CEO changed duty or retired,outsider successor,no TMT turnover ?0.10?0.06(0.39)(0.37)CEO changed duty or retired,outsider successor,TMT turnover 0.440.63?(0.28)(0.25)CEO left ?rm,illness or death ?0.47?0.42?0.23(0.76)(0.76)(0.73)Only non-CEO TMT turnover

0.120.130.130.17?(0.07)(0.07)(0.07)(0.07)Prior 1-year industry-adjusted shareholder rate of return 0.00020.00020.00020.0004(0.0017)(0.0017)(0.0017)(0.0007)Prior 3-year industry-adjusted shareholder rate of return ?0.12?0.13?0.13?0.28(0.21)(0.21)(0.21)(0.17)Prior industry-adjusted net income divided by total assets 0.080.080.080.06(0.16)(0.16)(0.16)(0.13)Prior log of book value of total assets 0.76??0.75??0.74??0.14??(0.10)(0.10)(0.10)(0.02)Prior Ratio:R&D to book-value of assets 1.61? 1.59? 1.60??1.05(0.94)(0.95)(0.95)(0.79)Prior Ratio:market to book-value of assets ?0.19???0.19???0.19???0.32??(0.06)(0.06)(0.06)(0.04)Prior log of CEO tenure 0.040.050.05?0.01(0.05)(0.05)(0.05)(0.04)Observations

8096

80968096

17,313

Not reported are coef ?cients on twelve year-indicator variables.Because Model (6)is not a ?xed-effects model,it includes industry-indicator variables.??Signi ?cant at 1%.?Signi ?cant at 5%.

909

J.M.Barron et al./Journal of Business Research 64(2011)904–910

possible scenarios of contender,follower,and outsider succession. Overall,only CEO departures from the?rm that are accompanied by other TMT departures are signi?cantly correlated with discontinued operations.This?nding supports Hypothesis3.

Model(5)also helps evaluate Hypotheses4–6.Hypothesis4is supported,as we?nd strong signi?cance for cases of contender succession associated with turnover in the TMT.Contender succession in cases when the CEO is the only member of the TMT to leave the?rm does not show signi?cance.Hypothesis5is supported,as we observe no signi?cance in cases of follower succession either with or without concurrent turnover in the TMT.Hypothesis6is supported,as we observe signi?cance in cases of outsider succession associated with turnover in the TMT,but not in cases of outsider succession by CEO alone.Overall,our results suggest that the turnover behavior of non-CEOs must be included in the analysis of strategic change at the?rm and the upper echelons perspective needs to be integrated with the contender/follower/outsider succession scenarios suggested by the power circulation theory.

In the above results,the sample of?rms is restricted to those reporting a discontinuation at least once over the sample period.This enables any time-invariant?rm-level heterogeneity that remains after netting out the in?uence of control variables to be accounted for in the error and not spill into the coef?cient estimates.In Model(6) we forgo this sample restriction and explore the entire panel of?rms; the results are largely consistent with the?xed-effects analysis.One notable difference is some tendency toward larger point estimates on turnover measures,suggesting that?rms that are more likely to disclose a discontinued operation at any time within the sample period are also more likely to experience turnover.

5.Conclusion

Changes in top management teams are important events for a?rm. This research focuses on the correlation between different types of turnover in the TMT and strategic change at the?rm measured by disclosures of discontinued https://www.sodocs.net/doc/ea15895978.html,ing an extensive dataset,we are able to document that CEO turnover signi?cantly increases the likelihood of new discontinued operations,but that this link is limited in three distinct ways.First,we?nd that discontinued operations are associated with a CEO departure only if at least one other TMT member leaves the?rm with the CEO.This result demonstrates the importance of management teams in determining the?rm's real investment strategy.Focusing solely on CEO turnover does not provide a complete view of strategic change at the?rm.Second,we ?nd a link with discontinued operations in cases of contender succession but not follower succession.This?nding supports the power circulation theory and suggests that contender succession coincides with a mandate for strategic change.Our third result is that outsider succession is associated with new discontinued operations only if the prior CEO and prior members of the TMT leave the?rm at the time of succession.Failing to distinguish cases of outsider succession that involve TMT turnover from cases that do not may provide for the con?icting results on the effects of the outsider succession discussed by Karaevli(2007).

The implications of this study for future theoretical and empirical work on the link between turnover and changes in the?rm's portfolio of operations include the idea that such work should not focus solely on the CEO.Integrating the upper echelons perspective with the power circulation theory view of CEO turnover will provide for a better understanding of the impact of changes in organizational leadership on the?rm.References

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