An Empirical Analysis of Succession Planning

Using data from the Director Compensation Survey 2023 conducted by Deloitte Tohmatsu LLC, this study examines the characteristics of firms that adopt CEO succession plans and the consequences of their adoption. Firms that separate management execution from monitoring—such as those with executive officer systems, higher ratios of outside directors, and voluntary nominating committees—are more likely to implement succession planning. This finding is consistent with the view that when the board of directors has less opportunity to directly observe CEO candidates due to structural separation, succession plans become more necessary. Following the disclosure of a succession plan, stock prices respond positively to CEO turnover announcements. Consistent with prior research, we find that larger firms are more likely to adopt succession plans, supporting the view that organizations requiring skilled CEOs offer a training program in their succession plans. However, we do not find strong evidence that business diversification, institutional ownership, or foreign ownership significantly influence the likelihood of adopting succession plans.