When Do Outside CEOs Underperform? From a CEO-Centric to a Stakeholder-Centric Perspective of Post-Succession Performance

Abstract

How does the appointment of an outside CEO affect the hiring firm’s performance? Prior research has reported that outside CEOs tend to underperform compared to inside CEOs, with high performance variance. Extending CEO-centric perspectives, we predict that experiential learning enhances post-succession performance, while negative transfer learning undermines it. We then offer a novel, stakeholder-centric theoretical perspective, conjecturing that stakeholders’ negative sentiment toward the CEO appointment undermines post-succession performance. We further conjecture that outside CEOs are less effective in leveraging their executive experience and suffer more from negative transfer and negative sentiment when compared to inside CEOs, who can leverage their familiarity and social embeddedness in the firm, which explains why outside CEOs may underperform. Analyzing the appointments of CEOs in U.S. public firms, we find that counter to expectations, the length and breadth of their executive experience do not explain either post-succession performance or the performance differences between outside CEOs and inside CEOs. Rather, the misfit between CEOs’ corporate backgrounds and their firms’ characteristics and the negative sentiment surrounding their appointments explain performance differences and the underperformance of outside CEOs. Accordingly, our study directs attention to the important yet previously understudied reactions of stakeholders to CEO appointments.