...change leadership initiated by the death of a key executive can cause instability for companies and concern for shareholders, unless, of course, there is a plan for such contingencies. McDonald's Corp. appears to have had such a plan as the following Wall Street Journal article points out. Plan for calamity. That's what McDonald's

Corp. directors did in what could become a textbook case on solid succession planning. Hours after the sudden heart attack death

of McDonald's 60-year-old chairman and chief executive, Jim Cantalupo, directors announced that Charlie Bell, the 43-year-old president and chief operating officer, would succeed him. The swift decision gave immediate reassurance to employees, franchisees, and investors that the fast-food giant has a knowledgeable leader in place who can provide continuity and carry out the company strategies (Hymowitz and Lublin, 2004). The key was that McDonald's wanted to reassure the employees, franchisees, and investors that they have a knowledgeable leader in place that can provide continuity to carry out company strategies and enhance firm performance.

Conversely, it appears that the Coca-Cola company, even without the sudden death of a CEO, has struggled to replace its CEO as the following Wall Street Journal article by Terhune and McKay (2004) discusses.

It should be one of the most coveted jobs in U.S. business. The company owns the most identifiable consumer product brand in history.... Yet Coca-Cola Co.'s board is struggling to find its next chairman and chief executive.... In the current leadership

vacuum, the company faces increasing disarray and concerns that its star-studded board is wielding too heavy a hand in operations.... The company has changed leaders and strategies abruptly. As can be seen in both of these examples, there is concern that delays in naming a successor creates a leadership vacuum that could have employees and investors wondering who is carrying out the strategies of the organization and could negatively impact subsequent firm performance.

While academic research has shown that many large U.S. firms identify a top executive's heir well in advance of a succession event (i.e., relay method of succession planning) (Canella and Shen, 2001), it appears that few companies properly prepare for succession (Carey and Ogden, 2000). Whether a firm has a succession plan in place or not, it would appear reasonable that corporations, if there was a sudden death of a top executive, would want to name a successor as soon as possible to assuage the fears of investors, customers, and employees. If firms delay this decision to name a successor, employees, customers, and investors could become increasingly concerned that the company has no successor in place and that the company is not functioning effectively and that this could translate into subsequent poor financial and stock performance. Additionally, if firms select outside successors, constituents could be become concerned about a firm's strategic continuity. We test these assertions.

For a sample of firms that incurred a CEO death, we examine whether the time delay (e.g., number of days) in naming a successor, and origin of successor (insider or outsider), are associated with subsequent firm performance. We measure firm performance with various accounting indicators that reflect the actual operational performance of a firm. If our contentions are supported, we would expect to find that (1) delays in naming a successor and (2) selection of an outsider successor would lead to financial performance decreases. As a logical follow-on, we also examine whether delays in naming a successor and successor origin are associated with decreases in firm stock value. Since market measures indicate investors' perceptions of the firm's future performance potential (Daily et al., 2000), cumulative abnormal returns around the date of the death of the CEO should reflect how the market anticipated delays in the succession process and successor origin would impact future firm performance.

While there have been numerous studies that have examined top executive turnover and succession planning (e.g., Dalton and Kesner, 1985; Kesner and Sebora, 1994) and performance changes following top management dismissals (Denis and Denis, 1995; Hotchkiss, 1995), we are aware of no research that examines whether the delay in naming a successor after the death of a key executive is associated with subsequent firm performance. Further, we are aware of no research that examines whether successor origin affects firm performance following the death of a key executive. This study contributes to the existing literature by providing empirical evidence that delays in naming successors, initiated by the death of a top executive, are associated with decreasing operating performance and lower cumulative abnormal returns, implying value associated with succession planning. Further, this study provides empirical evidence that insider successors are more effective than outsider successors in the context of CEO death.

The remainder of this article contains six sections. The first provides a brief review of the literature and develops testing hypotheses. The next two outline data sources and sample selection procedures and present model overview. The following section provides variable definitions and descriptive statistics. The last two sections evaluate the results of this research, set forth conclusions, and discuss implications, limitations, and future research.

PRIOR RESEARCH AND HYPOTHESIS DEVELOPMENT

Chief executive officers and succession planning have long been the focus of academic research because the firm's top officer has substantial impact on a company's performance (Finkelstein and Hambrick, 1996). Because CEO succession can be...

NOTE: All illustrations and photos have been removed from this article.



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