Management Succession under Long-term Tournaments: Evidence from Japanese listed subsidiaries

Using Japanese data, we show that for broadly defined listed subsidiaries, when parent firms maintain long-horizon internal employee tournaments, they are more likely to carry out parent-appointed CEO successions (appointing a CEO sent from the parent company). Compared with non-parent-appointed successions, parent-appointed successions are less sensitive to subsidiary performance. We further find that parent-appointed successions are associated with significantly poorer post-succession operating performance, particularly when the parent firm operates relatively long-term internal tournaments. Taken together, these findings suggest that managerial succession serves as an important channel to preserve incentive effects of internal tournaments and may create opportunities for parent firms in terms of expropriation of minor shareholders in listed subsidiaries. Finally, subsidiaries with lower cash holdings are more likely to experience parent-appointed successions, whereas those undertaking non-parent-dispatched successions tend to increase their cash holdings following the succession event.