Their Reputations Precede Them: The CEO Successor's Reputation and Shareholders' Assessment of Adverse Selection

The CEO succession process is essential to the continued success of a firm; however, although theoretical work exists few empirical studies have been empirically examined questions regarding the firm?s adverse selection or the effect that reputation has on the perception of adverse selection by shareholders. The process of CEO selection lacks transparency for those outside the firm; what is known about the process is largely anecdotal. In this dissertation, I examine the effects that reputation has on the perception of adverse selection by using established reputation measures and developing new constructs. I study firms in which a CEO succession event has occurred and the newly appointed CEO has prior experience as a CEO. The hypotheses are tested using event study analysis.

Using a sample of 189 firms from COMPUSTAT, I find that the CEO reputation for the capability of leadership plays a role in the perception of adverse selection. Specifically, I find that higher CEO reputation for the capability of leadership results in a more positive reaction from the market?fewer market reactions that may signal a perception of adverse selection. Additionally, the reaction to the CEO succession has a stronger positive market reaction to high CEO the reputation for the capability of leadership when the percentage of contingent compensation for the newly appointed CEO is higher.

The results of this study provide limited, but compelling evidence that a positive reputation of the CEO does in fact influence the perceptions about adverse selection. Specifically, this study advances the concept that a positive CEO reputation for a specific capability, such as a capability of leadership, can diminish the information asymmetry during the CEO selection process, associated with agency theory, for the shareholders. These results suggest that the CEO selection and adverse selection literatures should continue to examine the role of reputation in the CEO selection process. The results of this research should encourage future scholars to test the adverse selection criteria, such as if a CEO has prior experience as a CEO or within an industry that are presented in theory. Research should also continue to develop measures for the CEO and firm reputation based on the information that is available in the market, such as the needs of firm as expressed in the firm?s reputation referred to as the going-in-mandate in this research.