conditions under which this relation holds, here called ‗CEO succession‘. The ratios of Return on Capital Employed (ROCE) and Return on Shareholders‘ Funds (ROSF) are selected to measure the company‘s financial performance. The nonparametric test is employed in the research to explore that the succession date in the first half-year could improve the company financial performance while there are no significant relationships between successor source, educational level, educational background, age of successor and company‘s financial performance.

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The ―upper echelon theory‖ that Hambrick & Mason (1984) put forward in their study, report that the top management team plays a fundamental role in shaping a company‘s financial outcomes. The president of the top management team is the chief executive officer, who is in charge of the company‘s operating business. Because of the key economic role played by chief executive officers there is a great deal of interest in how the managerial labor market functions in general, and in the causes and

consequences of managerial succession in particular (Huson, et al, 2002). Therefore, the succession of the chief executive officer is becoming a research topic of interest and also is a central event in the life of business and organizations (Lauterbach, et al., 1999). Hambrick & Mason (1984) show that a new top manager will have a

significant positive impact on company performance. Whether this is always the case or not, the CEO succession choice decision can be expected to have a crucial

influence on the company‘s performance.

The frequently debated issue is about the whether the CEO successor can improve the related company financial performance. Some studies indicate that CEO succession events improve the firm financial performance in positive way (Helimich, 1997;

Daxidson, Worrell & Dutia, 1993). And the year 2005 make a mark the crest of a long wave of governance reforms that began washing across the global corporate landscape in the late 1990s.

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What is the evidence for the high rate of CEO succession all over the world? Global turnover of CEOs set another record in 2005, with more than one in seven of the world‘s largest public companies making a change in leadership — compared with only one in eleven a decade earlier (Lucier, et al., 2006).

According to Fortune magazine, there are 182 European companies in the top 500 list in 2007. Accompany with these companies developing, CEO selection appears important to help the companies make profit. Lauterbach, et al. (1999) indicate that CEO succession improve company financial performance. But, does a succession of the CEO actually have an impact on the subsequent financial performance of a

Western European firm? The purpose of this study is to explore CEO succession issue by analyzing the relationship between CEO succession and company performance.

1.2 Problem definition

The managerial ability hypothesis from Hermalin & Weisbach (1998) and Clayton et al. (2005) posit that the board usually successes the CEO who has a low ability, or whose ability does not meet the needs of the company. The board selects a new CEO, whose ability is better adapted to the company‘s needs. Therefore, the company performance is expected to improve in the future. Bonnier & Brunner (1989) and Weisbach (1988) find that CEO succession events have a positive impact on the stock price; the study by Denis & Denis (1995) shows that the operating return to total assets will improve after the CEO successions.

The studies by Lauterbach et al. (1999) and by Huson et al. (2002) contributed to the research on executive successions and company performance, by examining CEO

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turnover and firm financial performance in the US context. Meanwhile, Jiang & Liu (2006) and Abe (1997) focus on the executive succession events in China and Japan respectively. The limitation of these researches is that the samples consisted of one country only. To test the hypotheses in the present study in another region of the world, will shed light on the generalizability of the model.

1.3 Research objective and question

This thesis selects 50 Western European companies, which experienced CEO succession in the calendar year of 2005 as a sample, and then aspires to examine the effectiveness of the CEO succession mechanism by analyzing the changes of the company‘s financial performance during the period of CEO succession from 1^st January of 2003 to 1^st January of 2007. This study will broaden the existing

knowledge on the CEO succession and the link to company‘s financial performance in the Western European context.

The aim of this thesis is to find out:

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immpprroovvee tthhee ccoommppaannyy’’ss ffiinnaanncciiaall ppeerrffoorrmmaannccee iinn WWeesstteerrnn EEuurrooppeeaann ccoommppaannyy mamannaaggeemmeenntt..

Huson et al. (2002) report that CEO succession mechanism seems to be a frequently applied governance tool by supervisory boards. To what extent can the mechanism actually influence the organizational financial outcomes in terms of ROCE and ROSF

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will be examined in this study. And this study will focus on the CEO succession and the link to the company‘s financial performance in fifty companies over a five years period. The research question is:

 WWhhaatt iiss tthhee rreellaattiioonnsshhiipp bbeettwweeeenn tthhee CCEEOO ssuucccceessssiioonn aanndd cchhaannggeess iinn tthhee c

coommppaannyy’’ss ffiinnaanncciiaall ppeerrffoorrmmaannccee?? :: AA WWeesstteerrnn EEuurrooppeeaann ssaammppllee..

1.4 Structure of the thesis

The thesis is composed as follow: First, the background of CEO succession issue is reviewed. Second, the existing theory is conceptualized which subsequently leads into the formulation of the hypotheses. The third chapter entails the research methodology;

data collection and the statistical analysis methods. In the subsequent chapter, the outcome of the data analysis would be presented. The last chapter will draw the conclusions, as well as discuss the main limitations and implications for future research and practice.

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Chapter 2: The effect of CEO succession on company’s financial performance

The choice of a chief executive officer (CEO) succession is a key organizational decision with potentially important implications for firm effectiveness (Datta &

Guthrie, 1994). Furthermore, it is one of the most essential strategies for the development of a firm (Zhang, et al., 2005) The relationship between the CEO

turnovers and organizational performance has received increased research attention in both of the strategic management and financial economic literature (Zajac, 1990).

Section 2.2 reviews the previous literatures and formulates the hypotheses. The subsection 2.2.1 discusses about the importance of succession in the management.

While the section 2.2.2 focus on discussion about five properties of CEO succession and the link to the company‘s financial performance. Section 2.3 elaborates the conceptual model of this master thesis. And Section 2.4, the last section, makes a summary of the whole chapter.

2.2 CEO succession in management

2.2.1 Importance of chief executive officer turnover

Numerous literature suggests that the individuals‘ responsible for strategic leadership firms influence strategic facilitate choices of specific organizational structure for optimal performance outcomes (Hambrick, 1989). This conclusion is understandable;

given the widespread belief that an organization‘s CEO has substantial impact on its performance (Lauterbach, et al., 1999). Furthermore, CEO succession is significantly

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different from personnel replacement at lower hierarchical levels (Rowan, 1983).

From the following figures 1 and 2, we can witness more statistics about CEO

succession rates by region from all over the world between 1995 and 2005. The figure 1 shows the CEO succession rates by region from all over world except Africa.

From the figure 2, we can see that the performance-related CEO succession ratios are rising during the period. But, does it work by CEO succession to improve the

company financial performance?

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Many studies focus on CEO succession in U.S. firms, e.g. Huson, Malatesta &

Parrino (2002), Lauterbach et al, (1999). Nevertheless, others look at CEOs in China and Japan, Jiang & Liu (2007), Zhang, et al, (2005), Abe (1997), Taki (1994)

respectively. These findings provide little guidance for practice, and so I would like to revisit the relationship between properties of succession and company financial

performance with the Western European sample, which studies seem to be sparse.

2.2.2 CEO successor origin

2.2.2.1 The composition of boards of directors

The composition of the board of directors, which has the formal authority to remove the top executives, has been suggested to have important influence upon the choice of CEO succession (Shen, 2000). Members of board of directors are commonly

classified as either ―insiders‖ or ―outsiders‖. An insider refers to a full-time officer of

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the corporation. An outsider is someone who does not serve in an executive capacity for the company in which he is a director (Dalton & Kesner, 1987). ―Board

composition‖ is ordinarily defined as the proportion of inside directors to total directors (e.g., Boeker & Goodstein, 1993; Baysinger, Kosnik, & Turk, 1991).

Some literature suggests that naming an external successor lead to a relatively high turnover rate among members of executive staff (Helmich & Brown, 1972). Firedman and Saul (1989) found that newly hired outsiders were more likely to dismiss

incumbent managers. In some cases, outside successors even bring a group of managers from their former organizations to help implement changes (Puffer &

Weintrop, 1991). Since outside succession entails greater change in management structure especially change in the executive ranks than inside succession, it is more likely to upset prevailing norms and expectations within an organization and be potentially threatening to inside directors who are also in top management positions (Lauterbach, et al., 1999). Given the abundant results of previous studies, I retest the affection of board composition upon successor choice with the Western European sample.

Although some studies have treated board composition as an important variable, the empirical results are quite mixed. Dalton and Kesner (1985) found no evidence of a significant relationship between external representation on the board of the directors and the inclination of the board to appoint an outsider to the top management position.

On the other hand, Boeker and Goodstein (1993) found a positive correlation between the percentage of outside directors and the likelihood of an external appointment.

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2.2.2.2 Predecessor Influence

Some researchers suggest that top management predecessor affects the choice of successors (White, Smith & Barnett, 1997; Reinganum, 1985). In particular, predecessor tenure (Frederickson et al., 1988) and predecessor origin (Boeker &

Goodstein, 1993) have been proposed as factors that influence the choice of successor.

The power and influence of a CEO predecessor can vary over time. Fredrickson, Hambrick and Baumrin (1988) suggest that a CEO gains power over time as he or she gains voting control, establishes a patriarchal aura, or co-opts the board of directors.

Additionally, incumbent leaders may be reluctant to give up their positions (Boeker, 1992). When they step down, they will also choose successors who are likely to maintain the current strategy, usually someone within the organization whom they already know well (Zajac & Westphal, 1996). The long-tenured predecessor may both have a greater power to influence choice of successor and have a greater opportunity to groom their successors from inside the organizations (Boeker & Goodstein, 1993).

Therefore, firms in which predecessors have long tenure may be more likely to name inside successors.

Many studies have not extensively examined the relationship between predecessor origin and successor origin. Nelson & Winter (1982) claim that organizations often follow past practices when faced with non-routine decisions such as the selection of a successor. For example, if a board of directors has most recently chosen an outside successor, it is likely to do so again.

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2.2.2.3 Intra corporate vs. Inter corporate succession

The successor origin is binary; a successor can only be either an insider or an outsider.

Most top management appointees are selected from among firm insiders, those who are already senior officers of the firm. However, this is not always the case. The decision to promote an insider or hire an outsider depends on the abilities of inside and outside candidates (Huson, Malatesta & Parrino, 2002).

Inside successors were defined as individuals who were previously employed within the executive spans of their predecessors; proponents of successors from inside highlight the importance of continuity. They stress the insiders‘ greater knowledge of the firm, and their established social networks (Chung, et a., 1987). Outside

succession occurred when the firm did not employ the newly appointed CEO at the time of the succession (Bommer & Ellstrand, 1996; Boeker & Goodstein, 1993;

Dalton & Kessner, 1985; Helmich, 1975). The successors from outside are generally prescribed as a remedy for firm difficulties (Helmich & Brown, 1972). When drastic changes are required, an outside manager appears more promising because she or he is not constrained by old policies and implicit contracts of the firm.

The advocates of internal succession stress the importance of continuity. They emphasize the internal candidates‘ greater knowledge of the firm‘s practices, and the established social networks (Chung, et al, 1987). Lauterbach & Weisberg (1996) argue that an internal successor has developed the existing corporate strategy with incumbent management and that he or she is more likely to maintain current strategies, corporate culture, and control structure.

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In contrast, executives hired from outside the organization are thought to have broader perspectives and a penchant for change. An external succession is generally

prescribed as a remedy for firm experiencing difficulties (Helmich & Brown, 1972).

Outsiders are more likely to introduce drastic changes in the company because an external manager is not constrained by old policies and precedent within the firm.

The abundance of internal successor candidates may influence CEO successor choice.

One measure that has been extensively examined as the indicator of the abundance of internal candidates is organization size (Lauterbach &Weisberg, 1996; Reinganum, 1985; Dalton & Kesner, 1983). Larger firms have a greater talent pull and constantly develop and train good management prospects within the firm (Lauterbach

&Weisberg, 1996). Lauterbach et. al. (1999), argue that the large firms have large internal pools of general management talent to draw an internal successor while small firms may have no other choice but to choose from outside because of their deficiency of qualified candidates. Hence, larger firms are more likely to recruit from the inside.

In contrast, smaller firms may not have a suitable internal candidate and may be forced to recruit from the outside.

A variable that has been cited frequently as a potential determinant of insider–outsider preference in CEO succession has been organizational financial performance. Dalton

& Kesener (1985) suggest that successful organizations are likely to maintain their current strategy. By contrast, poor performance typically makes organizations more open to strategic change (Boeker, 1989). Under such conditions owners and other stakeholders are more likely to urge that changes be made. Poorly performing companies may well select outside successors and organizations with acceptable or

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better performance may be inclined to select insiders instead. Datta & Guthrie (1994) conclude that lower profitability firms are more likely to recruit top management from outside. This is also in line with Taki (1994) who claims that on the basic of analysis of 142 Japanese companies, poor income performance increases the probability of CEO turnover.

However, the empirical evidence is not uniformly supportive. Fried & Gingh (1989) found no significant relationship between past performance and the source of

successor. Dalton & Kesner (1985) found a non-linear relation: organizations with poor or excellent past performance use a relatively high proportion of external

succession. At last, Boeker & Goodstein (1993) observe that firms in financial distress are more likely to seek management successors from outside of the firm.

These findings provide insight into when and why firms look for an insider versus an outsider, but they do not give evidence that which one is more effective. So I would like to analyze the relationship between company‘s financial performance and successor source with the Western European sample.

Hypothesis 1 (H1): CEO successor from outside influences the company’s subsequent financial performance in terms of ROCE and ROSF in a positive way.

Following the debate in the literature, it can be expected that this hypothesis depend on the company‘s past performance.

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2.2.3 Chief executive officers‘ educational level

Educational level has been viewed in the management literature as an indicator of an individual‘s various cognitive orientations. Specifically, Wiersema & Bantel (1992) have equated a high-attained level with greater capacity for information processing and receptivity to innovation. Consistent with the argument that educational level reflects an individual‘s openness to change and propensity to identify and evaluate newer alternatives, empirical research has found positive relationships between the educational levels of senior executives and the amount of innovation and strategic change in their organizations (Thomas et al., 1991; Wiersema & Bantel, 1992). This is also in line with Hambrick and Mason (1984), the ―amount, but not the type, of formal education of a management team will be positively associated with innovation.‖ Bantel & Jackson (1989) found that top managers possessing relatively high level of education led more innovative banks.

Dynamic industries pose multiple challenges for top managers —the managerial work is more varied and the information-processing task is generally more complex. In other words, such contexts require CEOs to be creative and innovative. And Thomas et al. (1991) find that CEOs with high educational levels tended to pursue strategies that emphasized differentiation and innovation. Overall, these arguments suggest that high levels of education are likely to be more valued in industries characterized by high growth rates, demand instability, and product differentiation.

Hypothesis 2 (H2): CEO successor with a ph-D degree influences the company’s subsequent financial performance in term of ROCE and ROSF in a positive way.

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2.2.4 Chief executive officers‘ educational background

MBA is a master‘s degree in business administration, which attracts people from a wide range of academic disciplines. Hambrick & Mason (1984) point that the executives with MBA diploma are not likely to seek innovations and adventure.

Because executives could avoid loss or mistakes, sacrifice the innovation and investment to pursue the short-term performance after the MBA training. In addition, Hambrick & D‘Áveni (1988) find that the top management team with more MBA background the better company performance they have, in the context with 60 US companies from 1970 to 1982. But Davidson III et. Al., (1990)‘s finding is that there is no significant relationship between return on stock and educational background.

The CEO with MBA can increase the diversity of the top management team in educational background. Greening & Johnson (1997) advocate that diversity of top management team‘s educational background could improve the decision-making and communication skills. Improved decision-making and communication skill should impact on the company financial performance in a positive way. This study discusses about the relation between CEO with MBA educational background and company financial performance.

Hypothesis 3 (H3): CEO successor with MBA diploma influences the company’s subsequent financial performance in terms of ROCE and ROSF in a positive way.

2.2.5 Date of CEO successions

The choice of the date of CEO succession is the one of important board‘s decisions.

Jiang & Liu (2006) indicate that succession happens in the first half year would

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improve the company performance in the coming years. Because the successors who become CEO in the second half-year have to apply their own manage plan in the next year. In order to explore this, dates of CEO successions will be tested in this study.

Hypothesis 4 (H4): CEO succession happens in the first half year influences the company’s subsequent financial performance in terms of ROCE and ROSF in a positive way than it happens in the second half of the year.

2.2.6 Chief executive officers‘ age

Under the perfect market economy, innovation is the lifeblood of enterprise.

Innovation includes not only the innovation of products, also innovation of market, technology, organization and systems and so on. Innovation is one function of executives, and the knowledge, age social environment of the executives are the important factors influencing capability and motive force of the innovation. However, risks exist in the innovation, especially in the area of innovation of institution and organization. Wisdom, as well as courage, is needed in the innovation. Elder CEOs have rich experience, but they are more conservative and have less motive forces. By contrast, younger CEOs have great passion on the innovation, and they dare to try new things.

Davidson III et al. (1990) found a negative correlation between successor‘ age and stock rewards, that is to say, the younger the successors are, the higher the profit will get; while the older successors can hardly make an excess profit. Cragg & King (1998) also noticed that younger CEOs make better financial performances. Murphy &

Zimmerman (1993) and Weisbach (1988) stated that CEO succession has a strong

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correlation with the CEO‘s age that it makes the CEO retire or not. Defond & park (1999) claimed that according to the previous studies, the reasons for CEO‘s withdrawals are not credible. Due to the human interference, companies seldom announce to the public that the change of the CEO is a result of the CEO‘s bad performance. In Murphy & Zimmerman‘s (1993) research, it can be confirmed that the financial performance is usually bad before the CEO withdraw. This thesis mainly analyze whether the successor‘s age influence the companies‘ financial performance instead of the withdrawal reasons.

Hypothesis 5 (H5): CEO successor who has younger age influences the company’s subsequent financial performance in terms of ROCE and ROSF in a positive way.

Given the results of previous studies about these properties of succession, I would like to test the relationship between the CEO succession and company‘s subsequent financial performance in terms of ROCE and ROSF.

Hypothesis 6 (H6): CEO succession influences the company’s subsequent financial performance in terms of ROCE and ROSF in a positive way.

2.3 The conceptual framework

The figure 3 provides a conceptual framework, which intends to clarify the essence of the chief executive officer succession issue. The diagram shows some factors, which could influence the CEO succession, and the relationship between CEO succession and the company financial performance. This study will test whether, and in which

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factors the CEO succession impact on the company financial performance in a positive way.

Figure 3:

Conceptual Framework

2.4 Summary

This chapter presented the constructs of this research by specifically interpreting the different elements under study. All elements within the conceptual model were discussed. While, the main literature and the results of the previously studies were provided. Since, all of my hypotheses have been formulated already; it is now time to move on forwards to the practice, procedures and rules of this study, the chapter 3.

Company Performance:

ROCE ROSF Source Educational

Background

Educational Level

Date of Succession

Age Properties of CEO Succession

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Chapter 3: The practice, procedures & rules of the study

This chapter will describe the methods and data used throughout this study. Section 3.2 will introduce the overall data collecting method and the sample. The following section, 3.3, will provide the procedure and way of measurement of each variable used in this study; the dependent, independent variables. The last section will show an overview of the data analysis.

3.2 Sample Description

This research could be labeled as being deductive, a comprehensive literature study to compose hypotheses and then empirical study test whether my hypotheses receive empirical support (Gill & Johnson, 2002). The data collected are of secondary nature;

annual reports, official websites of the companies; list of the Europe‘s 500 and the electrical database of AMADEUS.

The sample consisted of 50 Western European public listed companies that

experienced CEO succession events between 1^st January 2005 and 1^st January 2006.

The companies are all selected from the Netherlands, Sweden, Finland, Italy, Spain, France, Germany and the Untied Kingdom. All of these eight countries are all member states of European Union. The Netherlands locates in Western Europe, has the sixteenth largest economy in the world, and ranks tenth in GDP per capita in the worldwide. Sweden and Finland are Scandinavian countries. Sweden is the largest country by area in Northern Europe and fourth in all of Europe. Swedish industry is

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overwhelmingly in private control; unlike some other industrialized Western countries, such as Austria and Italy, publicly owned enterprises were always of minor

importance. Finland is the eighth largest country in Europe in terms of area and the most sparsely populated country in the European Union. It has a highly industrialized, free-market economy and high-technology manufacturing ranked second largest after Ireland (Finland Economy 2004, OECD) in all Europe. Italy locates in Southern Europe and was ranked as the seventh-largest economy in the world, and the fourth largest in Europe in 2006. Spain is the second largest country in Western Europe after France. According to the World Bank, Spain‘s economy is the eighth largest

worldwide and the fifth largest in Europe. France lies in Western Europe and ranked as the fifth largest economy in the world. Germany is a country in central Europe and the largest national economy in Europe, the third largest economy in the world. At last, the U.K. is an island country, lying off the northwestern continental Europe. These eight European Union member states as the sample in this research could stand for European to some extend. Besides, Germany, the Netherlands, France and Italy are all founding member states of European Union. Base on these different characters of eight countries, this sample could stand for the Western European context. After the countries gathering, we have to select companies from these countries.

There are two criteria of company selection in my sample. First, the succession information was initially obtained from a computerized search of all the annual reports of the companies from the eight countries in calendar year of 2005, which typically indicated the successor with a brief description of his background. Second, a manual research was conducted to confirm these succession events. Finally, fifty companies were collected to make up the sample. These are the latest information

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available, which help to build my findings on a contemporary broad-based sample of publicly held corporations.

3.3 Main variables description

In this section the main variables that are used in this study will be operationalized.

The dependant and independent variables and the measurements will be displayed in the following sections.

3.3.1 Dependent variables:

In this study properties of CEO succession are linked to company financial

performance. The CEO succession is expected has a causal positive relationship with company financial performance. The data on company financial performance were retrieved from company websites, annual reports and the AMADEUS database.

The company financial performance is measured by Return on Capital Employed (ROCE) ratio and Return on Shareholders Funds (ROSF) ratio. The two sets of ratios are calculated into two new groups of data. Furthermore, these data are used as dependant variable in the research.

The ROCE ratio has historically been quoted and represented as a fundamental measurement by most industry investors (Morin & Sherry, 2001). This ratio is sometimes referred to in the financial press as the primary measure of profitability.

This ―primary‖ measure of profitability is calculated as:

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Return on Capital Employed (ROCE) = ((Net profit before interest & taxation) / (Share capital + Reserves + long-term liability))  100

There are at least two reasons for me to choose ―ROCE‖ ratio as performance

measurement. First, industry and investors will possibly look at the relative size of the ROCE ratio, because a high ROCE ratio means the company is profitable. Second, some investors consider ROCE the primary measure of profitability since it compares the inputs (total capital invested into the company) with the outputs (profits generated by the company).

The change of the ROCE after CEO succession will be the dependent variable in the study. Because this study‘s aim is to explore whether CEO succession improves the company‘s financial performance, I choose the change in indicator of financial performance as a measurement.

Past company performance = Average ROCE: (ROCE2003 + ROCE2004 + ROCE2005) / 3

New company performance = Average ROCE: (ROCE 2006 + ROCE2007) / 2

Change of ROCE = New company performance – Past company performance

Ratio of ROSF also will be used to measure the company financial performance in this study too. Industry and investors have historically used the ROSF ratio as a measurement of the profit for the period, which is available to the owner‘s stake in a

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business (Morin & Sherry, 2001). This ratio is therefore a measurement of company‘s profitability. This ―primary‖ measure of profitability is calculated as:

Return On Shareholders Funds (ROSF) = ((Net profit after taxation &

preference dividend) / (Ordinary share capital + Reserves)) x 100

There are two reasons for this study to choose ―ROSF‖ as company financial

performance measurement. At first, investors and the industry will look at the relative size of the ROSF ratio. This is because a high ROSF percentage indicates that a company is profitable and has profit available for shareholders. Second, this is a narrower assessment of profitability (compared with ROCE) and therefore gives the investor a deeper insight into the profitability that they are concerned with. It is always critical to take professional investment advice before making any investment decisions.

The change of the ROSF after CEO succession will be the dependent variable in the study to be test too. Because this study‘s aim is to explore whether CEO succession improves the company‘s financial performance, I choose the change in indicator of financial performance as a measurement of improvement. The ROSF obtained over 5 years to overcome the possible fluctuations.

Past company performance = Average ROSF: (ROSF2003 + ROSF2004 + ROSF2005) / 3

New company performance = Average ROSF: (ROSF 2006 + ROSF2007) / 2

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Change of ROSF = New company performance – Past company performance

3.3.2 Independent variables 3.3.2.1 CEO successor origin

In this study, the inside successors were coded 0, and outside successors were coded 1.

The successor information was collected from the firm‘s announcement about succession and annual reports, which typically indicated the successor with a brief description of his background.

CEO successor origin is a dichotomous variable in this study.

Dichotomous variable = 0 means CEO successor comes from outside Dichotomous variable = 1 means CEO successor comes from inside

3.3.2.2 CEO successors‘ educational level

Bantel & Jackson (1989) offered a perspective that CEOs with higher education degrees can make more effective solutions, when they face to the complicated

problems. Therefore, it can be foreseen that companies, which need more professional skills and confront more fierce competition should have abundant knowledge in order to make the CEO absorb more information. It can increase the CEO‘s professional knowledge so as to improve the company‘s competition ability.

CEO successors‘ educational level is a dichotomous variable in this study.

Dichotomous variable = 0 means CEO successor without a ph-D degree Dichotomous variable = 1 means CEO successor with a ph-D degree

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3.3.2.3 CEO successors‘ educational background

Ham brick & Mason (1984) point that the executives with MBA diploma prefer to avoid risk to do innovation. Davidson III et al., (1990) find that educational

background does not influence the company financial performance. In order to clear this, educational background will be test in the research.

CEO successors‘ educational background is a dichotomous variable in this study.

Dichotomous variable= 0 means CEO successor without a MBA diploma Dichotomous variable = 1 means CEO successor with a MBA diploma

3.3.2.4 CEO successors‘ age

CEO‘s age is regarded as a factor, which affects the decision making of company innovation, Hambrick & Mason (1984), younger CEOs tend to pursue innovation, dare to take risk and prefer to change policies. Older CEOs are not willing to adopt new concept and action that they need job stability (Bantel & Jackson 1989;

Wiersema & Bantel, 1992).

3.3.2.5 Date of CEO succession

In this study, the date of succession in the first half-year was coded 0, and date of succession in the second half-year was coded 1. The date of succession information was collected from the firm‘s announcement about succession and annual reports.

Date of succession is a dichotomous variable in this study.

Dichotomous variable = 0 means succession happens in the first half-year Dichotomous variable = 1 means succession happens in the second half-year

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3.4 Summary

Chapter 3 showed the data collection procedure and the measurements both of the dependant and independent variables. The general information about sample has been displayed in this chapter. Since the overview of the sample is given here, it‘s time to move to the next chapter, analysis part.

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Chapter 4: Findings on the properties of CEO succession & company financial performance

This section will provide the empirical analysis. The pattern analysis will be showed in the section 4.2. The section 4.3 is about the descriptive data analysis. The following section, 4.4 will demonstrate the results of the statistical analyses for the hypotheses, and explain the empirical outcomes. The section 4.5 will give a summary of the empirical analysis.

4.2 Descriptive analysis

In the empirical research, the descriptive data analysis could reveal possible patterns and errors in the data, but even more important it tests for normal distribution for the data. This is particularly important in making statistical inferences. Therefore, descriptive statistics will be used to analyze and summarize the data in this sample.

--- Insert Table 6 about here ---

From the table 6, outcomes on skewness and kurtosis statistics are common indicators to examine normality. If the skweness and kurtosis are ranging between -1 and +1 the data could be described as normal distributed. However, in this sample, data on educational background, source and change of company financial performance are all ranging above -1 and +1. Thus, these kinds of data are not normal distributed

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variables.

However, many statistical procedures, including linear regression and independent sample T test assume that all the variables are normally distributed. The significant violations of the assumption of normality can seriously increases the chances of committing either a Type 1 or 2 errors. Where a Type 1 error is possible that researcher will reject H0 while it is true, whereas committing a Type 2 error means that researcher will accept H0 while it is wrong (Osborne, 2002; Siegel, 1957). In order to avoid these errors occurring in the analysis, this study chooses Non- parametric analysis method.

From the table 6, the four independent variables (namely Educational Background, Educational Level, Successor Origin and Succession Date) are dichotomous variables in this study and according to Mann & Whitney (1947) and Conover (1998), the nonparametric tests – 2 independent samples method must be used in the research.

Whereas other two variables are continuous variables, the correlate – Bivariate Correlations will be used to test the hypotheses (Xue, 2001).

The raw data of the sample should be examined firstly. The table 1 contains the main characteristics of the sample. In the present sample, the mean age of the CEO

successors is about 51 years old. The std. deviation of age is 6.712, so the range of age is not wide. This could imply that in practice, companies do not like to recruit young executive officers in these Western European companies.

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As we can see in the table 1, inside succession is more frequent than outside succession; only around 19% of the successors are from outside the company. It‘s different from the research that outside succession has become more prevalent in the U.S. companies (Hager & Driscoll, 1991). Meanwhile, this study finds that about 40%

CEO successions happened in the second half year in this sample. More succession happened in the later half of 2005.

Table 1 also outlines that approximate 13% of the CEO successors have an MBA diploma and 28% a ph-D degree respectively in the sample. This finding is different from studies in U.S. companies. Palia (2000) find about 13.4% CEOs have MBA diploma and only 2% CEOs have ph-D degree in U.S. companies from 1971 to 1997.

So few CEOs hold ph-D degree in American companies. However, around 44%

German CEOs have ph-D, in this research. This leads to a relatively high percentage of CEOs holding a ph-D in this Western European sample. Surprisingly, Palia (2000) discovered that approximately 27.8% CEO with MBA in his sample from 1978 to 1997 The ratio is much higher than 13% in Western European companies.

As we can see in the Table 1, the sample consist of large and small firms, the total assets range from €5,912.00 to €464,290,000.00 Past studies have found that small- sized firms are more likely to choose a successor from outside (Lauterbach &

Weisberg, 1996; Reinganum, 1985). The finding from this research is in line with the past studies; small-sized firms have more successors from outside than large-sized ones.

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--- Insert Tables 2 to 5 about here ---

Tables 4 and 5 outline the annual ratio of ROCE and ROSF from 2003 to 2007. This study set the ratios in 2005 as 100; the other ratios are index to 2005. It is found that during the period before the succession (year 2003 and 2004), around 62% and 58%

companies did worse in ROCE and ROSF respectively than after the CEO succession.

These statistics can explain what we have seen from figure 2 that about 40% Western European CEO successions are performance-related in 2005.

From the figure 3, we can see that the two companies (Speedy Hire PLC and Sociedad General De Aguas) experienced the succession produced better financial performance then before. The financial performance of the both companies increased almost 41%

in 2007 compared to the succession year.

Figure 4:

Change of ROCE & ROSF from 2003 to 2007 (index to 2005)

0.0 20.0 40.0 60.0 80.0 100.0 120.0 140.0 160.0

2003 2004 2005 2006 2007

SPEEDY HIRE PLC 94.9 .SOCIEDAD GENERAL DE AGUAS n.a

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From the Tables 2 and 3, about 36% and 44% companies received worse financial performance in terms of ROCE and ROSF after succession when compared to

financial performance in 2005. For example, ENI and CHN Global N.V., which from the sample are displayed in the Figure 4. The figure 4 shows that the financial

performance kept decreasing from 2003 to 2007, although they each did experience a CEO succession. The reduction of the financial performance couldn‘t be controlled.

According to the statistics of table 3, we can argue that the succession does not work effectively for every company in this research. Fortunately, the tables 2 and 3 report that approximately 60% companies received better financial performance than before the succession.

Figure 5:

Change of ROCE & ROSF from 2003 to 2007 (index to 2005)

-100.0 -50.0 0.0 50.0 100.0 150.0 200.0 250.0

2003 2004 2005 2006 2007

ENI CNH GLOBAL N.V.

There are some companies‘ financial performance were rising before the succession in 2004, e.g. British Airways and AstraZeneca PLC. But from 2005, both the

companies‘ financial performance turned to decrease. Even experienced successions, they could not stop the decreasing trend. We can find this in the figure 5.

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Figure 6:

Some companies from the sample kept the financial performance growing until 2007.

France Télécom and Renault are given to be examples in the figure 6. The financial performances of these two companies were increasing from 2003 to 2006, but both were reduced in 2007.

Figure 7:

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Different from the companies in the figure 6, I find Ramirent OYJ and Heidelberg Cement AG ‗s financial performance were decreasing from 2003 to 2006, as showed in figure 7. In 2007 both of the companies‘ financial performance increased. Maybe the successors are able to improve the companies‘ financial outcomes.

Figure 8:

There are 36 different kinds of situations theoretically. While there are 5 different patterns are found in this sample. The table 7 shows the detail information about pattern analysis in the appendix. These different patterns demonstrate the different changes of the company‘s financial performance. Although the changes of the company performance after the CEO succession are discovered, it is not easy to clarify whether the company performance is systematically influenced by the

succession. Thus in the following part, the relationship between the properties of CEO

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succession and company financial performance will be tested.

4.3 Explanatory analysis

Following the analysis of the last section, the nonparametric test method will be used in this section, and the results of the hypotheses testing will be stated. In this study, I expected positive relationships between these properties of CEO succession and company financial performance.

First, I employ Mann-Whitney Test to test hypotheses 2 to 5 and Spearman correlate to test hypotheses 1 and 6 to explore if there are positive relationships. According to (Xue, 2001), if the numbers of the sample, which are tested in the Mann-Whitney, test less than 30, the Excact Sig values would be selected as criterion; otherwise the Asymp.Sig values would be selected as criterion to measure the significant level. As we can see the numbers f sample are 26 and 28 in the tables 11 and 16, other sample all have more than 30 variables. It means the Asymp. Sig values would be figured out from table 11 and 16, the Excact Sig values would be figured out from other tables.

From the SPSS output tables 12 to 16, we can see that the two-tailed p-value in the results are .547, .403, .002, .754, .574 and .446 respectively. These p-values could indicate that with α set on .01, the null hypotheses are accepted, except the H4. Since the p-value of .002 < .01, the null hypothesis of H5 is rejected here, which means that as the more succession happen in the first half year, the company financial

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performance tends to increase. The relationship is positive and significance at the 1%

level, or better.

But, is this finding true? I will test these hypotheses by another indicator ROSF to confirm. From the SPSS output tables 17 to 21, we can read that the p-value in the results is .403, .948, .005, .490 and .487 respectively. These p-values could indicate that with α set on .01, the null hypotheses are accepted except the H4. Since the p- value of .005 < .01, the null hypothesis of H5 is rejected here. From what have been discussed above, I can state that there is a significant relationship between the date of succession and the company‘s subsequent change in financial performance.

4.4 Summary

To sum up, only the hypothesis 5 is supported in this study. The hypotheses 1, 2, 3, 4, 6 are all rejected, so the hypothesis 7 could not be supported either. According to Z- value are -3.109 and -2.773 in the tables 12 and 17; we can safely conclude that there is a negative relationship between the date of succession in the second half year and company financial performance. The CEO succession does generally not help a company to (further) improve its financial performance.

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Chapter 5: Conclusion on CEO succession impact on the company’s financial performance

After analysis it is time to discuss the main conclusions. Before discussing the findings, the research question is repeated:

  WWhhaatt iiss tthhee rreellaattiioonnsshhiipp bbeettwweeeenn tthhee CCEEOO ssuucccceessssiioonn aanndd cchhaannggeess ooff tthhee cocommppaannyy’’ss ffiinnaanncciiaall ppeerrffoorrmmaannccee?? :: AA WWeesstteerrnn EEuurrooppeeaann ssaammppllee..

The following sections will provide the discussion and findings on the statistical analysis. Section 5.2 will provide the discussion concerning the assumed relationship between properties of CEO succession and company financial performance. Section 5.3 will discuss about the limitations of this research and show suggestions for further study.

5.2 The CEO succession and company’s financial performance

The major purpose of this study was to explore the relationship between CEO succession and the company‘s financial performance in Western European context.

This study examined the independent effects of five antecedents: successors‘ origin, successors‘ educational level, successors‘ educational background, age of successors and time of the successions.

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The following are the main findings of this study. The analyses have shown that only one factor contributed to the company‘s financial performance. This is the study‘s unique contribution and this statement appears to have been sparse in the management.

Only Jiang & Liu (2006)‘s study, which one is in Chinese, report that there is a negative relationship between the date of succession in second half year and short- term company performance. The Jiang & Liu (2006)‘s conclusion is based on 1,338 Chinese public traded enterprises from 1999 to 2003.

From the data analysis above, it is obvious that one of the most significant decision- makings by the board is the date for CEO succession. When the annual report shows the company performance is not what has been planned, the board is possible to change the CEO around the date of the annual report release in order to rebuild the investors‘ confidence. Because such action can transmit a signal to the investors that the board has noticed and fired the predecessor, and it has already selected another one who is suited for the future development. If the CEO succession takes place in the first half of the year, a rational successor is conscious of the missions he/ she

undertakes, so is the bad consequence after he cannot alter the status quo. Thus the company performance would be improved in the rest time of the year. However, if the CEO succession happens in the latter half especially the end of the year, the successor may realize the company performance of the present year is the former CEO‘s

responsibility, and the following year does be the key period for the new one to show his/her talent and foster a good image so as to retain his/her position. Therefore it can be foreseen that this kind of successor would have a motivation to improve the company performance after succession year.

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Wiersema & Bantel (1992) have equated a high-attained educational level with greater capacity for information processing and receptivity to innovation. And Thomas et al. (1991) find that CEOs with high educational levels tended to pursue strategies that emphasized differentiation and innovation. Based on these arguments, I supposed that CEOs with high educational level could have a positively impact on the company‘s financial performance. But in this study, no evidence can prove this argument. Since the CEOs with high educational level tended to pursue strategies that emphasized differentiation and innovation, the company outcome should be different from other companies. This study only examined the company financial performance within 5 years; the further study could prolong this period to test this relationship.

Hambrick & D‘Áveni (1988) find that the top management team with more MBA background the better company performance they have, in the context with 60 US companies from 1970 to 1982. There is not any evidence implying that the MBA influences the company‘s financial performance positively in this study. This is in line with Davidson III et al. (1990)‘s finding is that there is no significant relationship between return on stock and educational background. For these different findings, the different geographic context could also be the reason. This study‘s sample consisted of Western European companies, while the Hambrick & D‘Áveni (1988) studied U.S.

companies. From this research, we may report that CEOs with MBA are not more effective in this sample than those without MBA. But, we have to be cautious about this conclusion given the limited sample. For the sample size is relatively small compared to related studies and there is no control sample in this study. In addition, compared with 27.8% CEO hold MBA in U.S. companies from 1978 to 1997 in Palia (2000)‘s research, only 13% CEO with MBA in this research. From this point, MBA

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is not as common in Western European companies as in U.S. ones. The educational system and its valuation are different, e.g. MBA degree is lower level than Msc equivalent education in Western European context.

In this study, about 81% of the companies choose the successors from inside not the outside ones. This is in spirit of Lauterbach et al. 's (1999) who find that boards of directors are likely to appoint too often from inside. This indicates that the board of directors faces an agency problem. The further study could explore this issue.

In conclusion, except the date of succession can affect the company‘s financial performance there is no significant relationship between the properties of CEO

succession and company financial performance. CEO successions do not influence the company financial performance positively. And the CEO succession as governance mechanism may only be effective under certain circumstances in Western European companies.

The interactions among the properties of succession were not studied; perhaps the interactions could affect the relationship between succession and company‘s financial performance. According to the conceptual model, future research can study the interactions between the properties of succession. The interactions among the properties of succession may influence the relation between succession and company‘s financial performance. From what have been discussed above, I would like to recommend to Western European companies that they do not regard CEO succession as a panacea.

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5.3 Limitations and further research

The findings and interpretation and subsequent discussion should be considered in the context of this study‘s limitation.

First of all, the sample selection should be improved in the further study. During the data collection period of this study, some information was not available; this caused missing data in empirical analysis procedure and a limited sample size. Further could enlarge the size of the sample, select more companies from more countries. For there is no control group in this research, further research can introduce a control group to compare the outcomes from this thesis. The control group should conclude companies from the same countries, which did not experience CEO succession in the same period.

Thus, the results from these two groups can be compared to confirm or refuse the result of this thesis.

The second limitation is that my hypotheses are not exhaustive and the evidence is only suggestive. Shen and Cannella (2002) suggest that the true causes for CEO successions are always complicated, and there may exist some unobservable or hard- to-observe influential factors. Thereby, hypotheses of the study are predictions averages and general tendencies. No individual company predictions can be made.

To sum up, in this study it was tried to test existing theory on the CEO succession, with the goal to find a relationship with the company financial performance.

Theoretical findings lend support to the argument the some properties of CEO

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succession positively influence the company financial performance. However, the statistical findings provide weak evidence to support the expectations.

Third, the analysis about educational level and background part could be further investigated. In Western European context, further research can category educational levels into more layers. Meanwhile, further research can compare the MBA with relevant degree. Maybe the relevant degree could affect the company‘s financial performance in Europe.

At last, further research can for example, extend this study by exploring the more properties of the CEO succession in more detail. Nevertheless, further research as well as the analysis results offer stimulating research openings, but require the collection of data beyond those available for this thesis.

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