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CEO Champions: What Drives Their Success? Can They Be Effectively Replaced?

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CEO Champions: What Drives Their Success? Can They Be Effectively Replaced? Thesis submitted in partial fulfilment of the requirements for the degree of Doctor of Philosophy CEO Champions: What drives their Success? Can they be Effectively Replaced? by Tianjiao Yuan Henley Business School ICMA Centre Reading, May 2017 I Declaration of Original Authorship I confirm that this is my own work and the use of all material from other sources has been properly and fully acknowledged. Reading, 30.05.2017 Tianjiao Yuan II Abstract This thesis constructs unique CEO performance measurements and rankings, which focus on long-term firm performance from different dimensions. The first empirical analysis of this thesis defines CEO Champions and examines whether CEO Champions can be successfully replaced by their successors. Two CEO Champion Leagues are constructed, and performance of these CEOs and their successors are tested. The documented results show that CEO Champions' successors outperform the successors of Non-Champions' on average. Although Champions’ successors cannot sustain their predecessors’ performance in the univariate framework due to luck reversion, growth cyclicality and priorities diversion, they tend to generate as superior operating performance as their predecessors did after controlling for growth cyclicality in the multivariate framework. These robust findings suggest that corporate boards can effectively replace CEO Champions on average by hiring better successors. Also, predecessors’ legacies left within the firms after stepping down substantially affect their successors’ performance in voluntary turnover events. The second analysis of the thesis explores under what circumstances the successors tend to outperform their champion predecessors. It examines corporate governance, successor origin, predecessor influence and controls for changes in CEO and firm characteristics. It documents a robust and negative relation between insider dummy and successful replacement, indicating that outsiders are more likely to replace champion predecessors successfully. In line with the reputational capital view of directorships, a busy board is found to have better capability to replace CEO Champions effectively. Champion predecessors tend to be reappointed to the board, and their successors tend to sustain their success. Champion founders' successors are demonstrated to have greater performance improvement after turnover events, which suggest that champion founders are less likely to be entrenched. The final empirical analysis focuses on constructing two effective CEO performance measurement indices to build CEO rankings and reveal Top 100 CEOs in each CEO list. Results show that the weighted performance CEO ranking is negatively and significantly associated with the forced turnover dummy, suggesting that higher ranked CEOs are less likely to be forced out. Also, the weighted performance CEO ranking in this study has better prediction power than other forced turnover prediction models with single performance measure. III Acknowledgements First and foremost, I would like to express my gratitude to Dr George Alexandridis and Dr Christos Mavis for their guidance and encouragement in the supervision of this thesis. During the past four years and a half, they have provided me with continuous encouragement and support, which extensively developed my critical thinking skills. I would also thank for their understanding and consideration towards my parenting and work during Ph.D. study. I would like to show my appreciation to Professor John Doukas and Dr. Andrey Golubov for sharing their expertise and providing valuable suggestions for my Ph.D. study. Similarly, the discussions and brainstorming with my colleagues in ICMA Centre have been constructive and intriguing. I would like to thank Dr. Xiaoyan Zhou, Dr. Ziou Feng, Zhenyi and Dr. Hanyu for providing advice for my thesis. Extra special thanks to Wil Graham for reading my entire thesis word by word. I want to thank my external examiner Dr. Leonidas Barbopoulos from University of St Andrews and internal examiner Professor Michael Clements for an open and fair discussion of the thesis during the viva voce examination and all their valuable suggestions for my future research. Furthermore, I am grateful to the ICMA Centre for funding my research and providing great facilities and an excellent research environment. Also, I have very much enjoyed my teaching experience at the ICMA Centre, which made it possible to broaden my understanding of financial theories and to interact with lecturers and students. I would also like to express my appreciation to David, the founder, Pollyanna, the managing director of Centurion Portfolio Managers Ltd., and my colleagues Wil, Lisa and Danielle for all their support during my thesis writing phase. Most importantly, my sincere thanks to my parents Chengfu and Jingqiu, my husband Shiyang and my little daughter Yilin for their love, trust, encouragement, and support not just during my Ph.D. studies but through my life. IV Table of Contents Declaration of Original Authorship .............................................................. II Abstract ......................................................................................................... III Acknowledgements ........................................................................................ IV Part I Introduction to the Thesis ....................................................... 1 1. Overview ....................................................................................................... 3 1.1 Motivation .................................................................................................................... 3 1.2 Structure of the Thesis and Original Contribution ....................................................... 8 2. General Literature Review ......................................................................... 9 2.1 CEO Turnover and Firm Performance ......................................................................... 9 2.1.1 Forced Turnover and Firm Performance ............................................................... 9 2.1.2 CEO Unexpected Deaths and Firm Performance ................................................ 12 2.2 Board Quality, Corporate Governance, and CEO Succession Plans ......................... 12 2.2.1 Board Quality ...................................................................................................... 13 2.2.2 Successor Origins: Insiders vs. Outsiders ........................................................... 14 2.2.3 CEOs’ Retention on the Board ............................................................................ 15 2.2.4 Corporate Governance ......................................................................................... 15 2.2.5 Firm fixed effects and CEO style effects ............................................................ 16 2.3 CEO Championship Measurements ........................................................................... 18 2.3.1 Potential Approaches to Defining CEO Champions-Media Awards .................. 19 2.3.2 Potential Approaches to Defining CEO Champions-CEO Ability ..................... 19 2.3.3 Potential Approaches to Defining CEO Champions-Prior Firm Performance ... 20 2.3.3.1 Operating Performance Measures ........................................................................... 20 2.3.3.2 Stock Performance Measures ................................................................................... 21 2.3.3.3 Analyst forecast Surprise Measures ......................................................................... 21 2.3.3.4 Investment Performance Measures........................................................................... 22 2.3.4 CEO Characteristics and Firm Performance ....................................................... 24 2.3.4.1 CEO Tenure, Age, Gender and Compensation ......................................................... 24 2.3.4.2 CEO Prior Experience and Founder Status ............................................................. 26 2.4 Conclusion ................................................................................................................. 26 Part II Empirical Analyses ............................................................... 27 V 3. The day after CEO Champions: Can they be successfully replaced? .. 28 3.1 Introduction ................................................................................................................ 28 3.2 Research Design ......................................................................................................... 34 3.2.1 Research Questions and Successful Replacement Conjectures .......................... 34 3.2.1.1 CEO Champions Effective Replacement Conjecture ................................................ 34 3.2.1.2 CEO Champions Remaining Influence Conjecture .................................................. 34 3.2.1.3 CEO Champions Legacy Conjecture ........................................................................ 35 3.2.2 Hypotheses Development .................................................................................... 35 3.2.2.1 Luck Reversion ......................................................................................................... 35 3.2.2.2 Growth Cyclicality and Divert Priorities ................................................................. 36 3.2.3 The definition of the CEO Champions ................................................................ 37 3.3 Data and Sample .......................................................................................................
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