Internal vs. external successions and their effect on firm performance

An examination of 165 top management successions in U.S. firms during 1989-91 reveals that external successions are more likely in small firms, in firms with poor economic performance, and in firms which offer the successor several top positions (for example, Chairman and CEO). This last finding illustrates that successor's interests and demands (such as organizational power) are also important in determining the final match between manager and firm. We also find that, on average, the postsuccession performance of external successors is superior to that of internal successors. This could indicate that the Board of Directors faces an agency problem, leading it to appoint too often from inside.