Zhang’s study, “Information Asymmetry and the Dismissal of Newly Appointed CEOs: An Empirical Investigation,” finds that these dismissals may be due to the effects of information asymmetry -- a situation where one party knows less inside information than the other. In the instance of CEO selection, the board of directors of the hiring firm knows less than the CEO candidates regarding the candidates’ true competencies. As a result, it is possible that the board makes a faulty hire and then dismisses the CEO shortly after the succession.
Unbalanced information can negatively impact the selection of a new chief executive in three ways. The first concerns the origin of the new CEO — whether he or she was an internal or external candidate. The second is the context of the preceding CEO’s departure — whether it was a voluntary departure or a dismissal. And the third is the composition of the board of directors’ nominating committee — whether they are primarily in-house or independent directors and whether they serve on a number of other boards.
The origin of the new CEO is important because inside candidates are typically already chief financial officers, chief operating officers or executive vice presidents with the company, said Zhang, associate professor of management at Rice.
“They would have had numerous opportunities to interact with the board members,” Zhang said. “The board has a great opportunity to know inside candidates, thus reducing information asymmetry between the board and inside candidates.”
Meanwhile, the board is less likely to know outside candidates and more likely to make a poor hiring decision in outside successions.
The conditions of the preceding CEO’s departure also play a tremendous role in the success of the next chief executive, Zhang said. Because many companies institute mandatory retirement ages, planned succession can help ease a seamless transition, as a company can groom an heir apparent before the CEO departs. Also, if the company doesn’t have a good pipeline of talent, the board can search in advance of the retirement -- making it more likely that a comprehensive internal and external search will turn up higher-quality candidates. However, if the preceding CEO is dismissed, then inadequate preparation means higher information asymmetry and a higher likelihood that the board will make a poor hiring decision.
The composition of the board’s nominating committee may have an influential effect on early CEO dismissals. Nominating committees that are primarily independent (not consisting of company executives) are better than those with internal directors, because the latter may perceive themselves as contenders for the position.
“They’re not going to bring objective evaluations to the CEO selection process,” Zhang said. “However, if a company has outside directors on the board and those outside directors are too busy — having too many other directorships — then the nominating committee is not as effective.”
David Ruth | EurekAlert!
New study: How does Europe become a leading player for software and IT services?
03.04.2017 | Fraunhofer-Institut für System- und Innovationsforschung (ISI)
Reusable carbon nanotubes could be the water filter of the future, says RIT study
30.03.2017 | Rochester Institute of Technology
The nearby, giant radio galaxy M87 hosts a supermassive black hole (BH) and is well-known for its bright jet dominating the spectrum over ten orders of magnitude in frequency. Due to its proximity, jet prominence, and the large black hole mass, M87 is the best laboratory for investigating the formation, acceleration, and collimation of relativistic jets. A research team led by Silke Britzen from the Max Planck Institute for Radio Astronomy in Bonn, Germany, has found strong indication for turbulent processes connecting the accretion disk and the jet of that galaxy providing insights into the longstanding problem of the origin of astrophysical jets.
Supermassive black holes form some of the most enigmatic phenomena in astrophysics. Their enormous energy output is supposed to be generated by the...
The probability to find a certain number of photons inside a laser pulse usually corresponds to a classical distribution of independent events, the so-called...
Microprocessors based on atomically thin materials hold the promise of the evolution of traditional processors as well as new applications in the field of flexible electronics. Now, a TU Wien research team led by Thomas Müller has made a breakthrough in this field as part of an ongoing research project.
Two-dimensional materials, or 2D materials for short, are extremely versatile, although – or often more precisely because – they are made up of just one or a...
Two researchers at Heidelberg University have developed a model system that enables a better understanding of the processes in a quantum-physical experiment...
Glaciers might seem rather inhospitable environments. However, they are home to a diverse and vibrant microbial community. It’s becoming increasingly clear that they play a bigger role in the carbon cycle than previously thought.
A new study, now published in the journal Nature Geoscience, shows how microbial communities in melting glaciers contribute to the Earth’s carbon cycle, a...
20.04.2017 | Event News
18.04.2017 | Event News
03.04.2017 | Event News
21.04.2017 | Physics and Astronomy
21.04.2017 | Health and Medicine
21.04.2017 | Physics and Astronomy