A Theory on CEO Replacement

I address the problem of corporate governance. I o¤er a theory of CEO replacement, using Nash bargaining game. CEO replacement involves the board monitoring of the CEOs and the CEO succession policy, which is in regards to the inside promotion or the outside recruiting of the new CEO when the incumbent CEO is …red. I argue that CEO replacement decisions made by the incumbent CEO and the incumbent directors may exhibit ine¢ ciencies from the point of maximizing corporate pro…t, and instead, these decisions tend to favor the incumbent directors and the CEO themselves. Keywords: Corporate Governance; CEO Succession Policy; Board Monitoring; Incumbent CEO; Rent JEL Codes: G30, D79, K22 University of Tokyo, Tokyo, Japan. University of Southern California (2008-2009), Los Angeles, CA, USA. Email: [email protected] I would like to thank Hideshi Itoh, Kazuya Kamiya, and Richard A. Braun for their invaluable advice and their constructive comments from the early stages of my research. I am also grateful to Ricardo Alonso, Harrison Cheng, Keiichi Kubota, Kevin Murphy, and Hiroshi Osano for their very helpful comments. I acknowledge the …nancial support from Japan Society for the Promotion of Sciences (JSPS).