CEO selection as risk‐taking: A new vantage on the debate about the consequences of insiders versus outsiders

• DOI: http://doi.org/10.1002/smj.3033
• Author: Vilmos F. Misangyi,Donald C. Hambrick,Timothy J. Quigley,G. Alessandra Rizzi
• Published date: 01 September 2019
• Date: 01 September 2019

RESEARCH ARTICLE

CEO selection as risk-taking: A new vantage on the

debate about the consequences of insiders versus

outsiders

Timothy J. Quigley

1

| Donald C. Hambrick

2

| Vilmos F. Misangyi

2

|

G. Alessandra Rizzi

2

1

Department of Management, Terry College

of Business, University of Georgia, Athens,

Georgia

2

Department of Management and

Organization, Smeal College of Business,

The Pennsylvania State University,

University Park, Pennsylvania

Correspondence

Timothy J. Quigley, Department of

Management, Terry College of Business,

University of Georgia, C211 Benson Hall,

Athens, GA 30602.

Email: tquigley@uga.edu

Abstract

Research Summary:Our paper sheds new light on the per-

formance implications associated with insider versus out-

sider CEOs. We frame CEO selection as risk-taking, in

which outsiders are relatively risky hires, with a greater ten-

dency to generate extreme performance outcomes—either

positive or negative—as compared to insiders. We base this

expectation on two complementary theoretical perspectives:

human capital and information asymmetry. We conduct

multiple tests on large samples of CEO successions, with

controls for endogeneity, and find that outsiders are indeed

associated with more extreme performance outcomes than

are insiders.

Managerial Summary:We shed new light on the perfor-

mance implications associated with outsider CEOs.

Instead of asking the customary question, “Do outsider

CEOs, on average, perform better or worse than insider

CEOs?,”we frame CEO selection as risk-taking. Under

this view, outsiders are relatively risky hires, with a

greater likelihood of generating extreme performance

outcomes—either positive or negative—as compared to

insiders. We conduct multiple tests on large samples of

CEO successions and find that outsiders are indeed associ-

ated with more extreme performance outcomes than are

insiders.

Received: 19 January 2018 Revised: 19 February 2019 Accepted: 25 February 2019 Published on: 19 April 2019

DOI: 10.1002/smj.3033

Strat Mgmt J. 2019;40:1453–1470. wileyonlinelibrary.com/journal/smj © 2019 John Wiley & Sons, Ltd. 1453

KEYWORDS

CEO selection, CEO succession, firm performance, outsider CEOs,

upper echelons

1|INTRODUCTION

In the vast literature on CEO selection, perhaps no question has been addressed more than whether out-

sider CEOs perform better or worse than insider CEOs. After many such inquiries, involving progres-

sively better analytic techniques, the performance implications of outsider versus insider CEO

appointments remain unclear, mixed, and apparently minor (summarized in Finkelstein, Hambrick, &

Cannella, 2009). There is an enduring sense among scholars and practitioners—including boards, inves-

tors, executive search firms, and others—that the outsider–insider distinction somehow matters. As yet,

however, there is little indication that it does, at least with respect to postsuccession performance levels.

We reframe this puzzle. Instead of asking whether outsiders perform better or worse than insiders,

we ask: Are outsiders riskier hires than insiders? Conceptualizing riskiness as an increased likeli-

hood of extremely favorable or extremely unfavorable outcomes (March & Shapira, 1987; Sanders &

Hambrick, 2007), we posit that outsider CEOs generate more extreme performance—either positive

or negative—than do insiders. As a foundation for this expectation, we draw primarily from two

complementary theoretical lenses that have been widely used to examine CEO selection: human capi-

tal (Bailey & Helfat, 2003; Parrino, 1997) and information asymmetry (Zajac, 1990; Zhang, 2008).

We test our core expectation on large samples of CEO successions in U.S.-based public corpora-

tions. Applying a series of tests, including analyses that control for mean-reversion and endogeneity,

we find consistent evidence that performance outcomes of outsiders are indeed more extreme than

those of insiders.

Our study directs new attention to the variance, or riskiness, associated with CEO selection. In

fact, with the sole exception of Bailey and Helfat (2003) (discussed below), we are not aware of any

prior studies of CEO selection that have examined distributions of performance outcomes or com-

mented on variances in such outcomes. As we discuss later, our interest in the distribution of CEO

selection outcomes could be applied in various additional ways, beyond the insider–outsider distinc-

tion. Once researchers better understand the relative riskiness of different types of CEO hires, they

can then explore the differences between risky hires who generate outcomes in the upper tail of the

performance distribution versus those in the lower tail.

2|THEORY

2.1 |CEO succession outcomes and the insider–outsider distinction

Over several decades, scholars have sought to understand the effects of leader replacement on organi-

zational performance. Recognizing that leader successions represent occasions for redirection and

adaptation, but also may bring disruption and trauma, researchers have explored many aspects of suc-

cession events (summarized in Finkelstein et al., 2009). As a complement to focusing on the succes-

sion event itself, some researchers have explored leader selection, asking: Given a succession event,

how do the attributes of the new leader matter? Within this stream, the most prominent focus—by

far—has been on the distinction between new CEOs who are selected from inside the organization

1454 QUIGLEY ET AL.