First Year in Office: How Do New Ceos Create Value?

This paper examines firm value creation associated with CEO turnover. The literature has focused on the heterogeneity in CEOs. We instead focus on the heterogeneity in post-turnover firm strategies, which are significant changes in senior management and operations. We show that the variation in strategy choices has significant explanatory power for the variation in postturnover performance. Examining strategies also advances our understanding of the relationship between CEO types and firm performance, and the effect of strategy tends to subsume the effect of CEO type. Within a firm, the value impact of personnel and operational shakeups is much stronger in turnover years than in non-turnover years. This result is not driven by the prior firm conditions that lead to the change of CEO, and is consistent with the agency view that CEO turnover is part of an error correction process in a corporation. In the cross section, firms that implement post-turnover shakeups outperform those that do not. One explanation supported by the data is that not all firms that choose not to shake up behave optimally due to some agency frictions. Overall, examining post-turnover strategy choices generates valuable new insights because strategies reflect the impact of not only the new CEO but also the institutional environment (e.g., agency frictions) that the new CEO operates in, both of which are relevant for understanding value creation associated with CEO turnover.