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The Relation between Strategy, CEO Selection, and Firm Performance

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  • Margaret A. Abernethy
  • Yu Flora Kuang
  • Bo Qin

Abstract

We examine whether a firm's strategic priorities influence its selection of a new CEO and what conditions enable such an appointment to add value to the firm. More specifically, this study investigates the value‐adding effect when prospector firms (i.e., those pursuing a prospector‐type strategy) select a CEO with high social capital. We argue that uncertainty, driven by a firm's strategy, will determine the decision to select a CEO with high social capital; such CEOs can use their networks to mitigate the uncertainty and thus can be valuable to the firm. However, prior research indicates that CEOs with high social capital can engage in behavior detrimental to firm value. To mitigate the potential for this to occur, we assess whether corporate governance can play a role in prospector firms who appoint CEOs with high social capital. Drawing on archival data of CEO successions over a 14‐year period, we find that prospector firms have greater incentives to appoint CEOs with high social capital. We also find that prospector firms who appoint a CEO with high social capital improve their performance. Furthermore, the value‐adding effect of this selection choice is stronger in prospector firms with good corporate governance. Relation entre stratégie, sélection du chef de la direction et performance de l'entreprise Les auteurs se demandent si les priorités stratégiques d'une entreprise influent sur le choix d'un nouveau chef de la direction et quelles conditions font en sorte que cette nomination puisse accroître la valeur de l'entreprise. Ils s'intéressent plus précisément à l'effet de création de valeur de la sélection par une entreprise prospectrice (c'est‐à‐dire dont la stratégie s'apparente à la prospection) d'un chef de la direction ayant un capital sociétal élevé. Selon eux, l'incertitude, engendrée par la stratégie de l'entreprise, appelle la décision de sélectionner un chef de la direction ayant un capital sociétal élevé ; les chefs de la direction présentant cette caractéristique sont en mesure de se servir de leurs réseaux pour réduire cette incertitude et peuvent donc être précieux pour l'entreprise. Les études antérieures indiquent toutefois que les chefs de la direction ayant un capital sociétal élevé risquent d'adopter des comportements préjudiciables à la valeur de l'entreprise. Les auteurs se demandent si la gouvernance d'entreprise peut contribuer à atténuer ce risque dans les entreprises prospectrices qui nomment des chefs de la direction ayant un capital sociétal élevé. En puisant dans les données d'archives relatives à la succession des chefs de la direction sur une période de 14 ans, ils constatent que les entreprises prospectrices sont davantage enclines à nommer des chefs de la direction possédant un capital sociétal élevé. Ils notent également que les entreprises prospectrices qui nomment de tels chefs de la direction améliorent leur performance. Il apparaît en outre que l'effet de création de valeur de ce choix est plus marqué chez les entreprises prospectrices dotées d'une gouvernance d'entreprise efficace.

Suggested Citation

  • Margaret A. Abernethy & Yu Flora Kuang & Bo Qin, 2019. "The Relation between Strategy, CEO Selection, and Firm Performance," Contemporary Accounting Research, John Wiley & Sons, vol. 36(3), pages 1575-1606, September.
    • Handle: RePEc:wly:coacre:v:36:y:2019:i:3:p:1575-1606
    DOI: 10.1111/1911-3846.12463
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    1. Hermalin, Benjamin E & Weisbach, Michael S, 1998. "Endogenously Chosen Boards of Directors and Their Monitoring of the CEO," American Economic Review, American Economic Association, vol. 88(1), pages 96-118, March.
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    Cited by:

    1. Charl de Villiers & Matteo La Torre & Vida Botes, 2022. "Accounting and social capital: A review and reflections on future research opportunities," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 62(4), pages 4485-4521, December.
    2. Mundi, Hardeep Singh, 2022. "CEO social capital and capital structure complexity," Journal of Behavioral and Experimental Finance, Elsevier, vol. 35(C).
    3. Luong, Thanh Son & Qiu, Buhui & Wu, Yi (Ava), 2021. "Does it pay to be socially connected with wall street brokerages? Evidence from cost of equity," Journal of Corporate Finance, Elsevier, vol. 68(C).
    4. Cao, Zhangfan & Chen, Steven Xianglong & Harakeh, Mostafa & Lee, Edward, 2022. "Do non-financial factors influence corporate dividend policies? Evidence from business strategy," International Review of Financial Analysis, Elsevier, vol. 82(C).
    5. Zheng, Min & Huang, Rong & Wang, Xintong & Li, Xiaorong, 2023. "Do firms adopting cloud computing technology exhibit higher future performance? A textual analysis approach," International Review of Financial Analysis, Elsevier, vol. 90(C).
    6. Block, Sidney T. & Friebel, Guido & Heinz, Matthias & Zubanov, Nick, 2022. "Mystery Shopping as a Strategic Management Practice in Multi-Site Firms," IZA Discussion Papers 15599, Institute of Labor Economics (IZA).
    7. Hansin Bilgili & Jonathan L. Johnson & Tsvetomira V. Bilgili & Alan E. Ellstrand, 2022. "Research on social relationships and processes governing the behaviors of members of the corporate elite: a review and bibliometric analysis," Review of Managerial Science, Springer, vol. 16(8), pages 2285-2339, November.
    8. Qin, Bo & Yang, Lu, 2022. "CSR contracting and performance-induced CEO turnover," Journal of Corporate Finance, Elsevier, vol. 73(C).
    9. Ahsan Habib & Dinithi Ranasinghe & Ahesha Perera, 2024. "Business strategy and strategic deviation in accounting, finance, and corporate governance: A review of the empirical literature," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 64(1), pages 129-159, March.
    10. Kuang, Yu Flora & Qin, Bo & Yang, Xing, 2023. "We are under attack: Terrorist attacks and director turnover," The British Accounting Review, Elsevier, vol. 55(5).
    11. Cao, Zhangfan & Chen, Steven Xianglong & Lee, Edward, 2022. "Does business strategy influence interfirm financing? Evidence from trade credit," Journal of Business Research, Elsevier, vol. 141(C), pages 495-511.
    12. Ghaly, Mohamed & Dang, Viet Anh & Stathopoulos, Konstantinos, 2020. "Institutional investors' horizons and corporate employment decisions," Journal of Corporate Finance, Elsevier, vol. 64(C).
    13. Chen, Chen & Dou, Ying & Kuang, Yu Flora & Naiker, Vic, 2023. "Do professional ties enhance board seat prospects of independent directors with tainted reputations?," Journal of Banking & Finance, Elsevier, vol. 154(C).

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