Someone Old or Someone New? The Effects of CEO Change on Corporate Entrepreneurship

Boards of directors often attempt to foster corporate entrepreneurship by replacing a firm’s chief executive officer (CEO). Compelling theoretical arguments and anecdotal evidence suggest that when firm performance has suffered, a new CEO is best suited to lead the firm’s creative endeavors. On the other hand, among firms that retain their existing CEO after a decline in performance, manipulating the CEO’s compensation package is a common governance practice used by boards to encourage innovation. In these cases, some have argued that increasing the CEO’s pay will encourage corporate entrepreneurship, because the CEO has been compensated for assuming additional risk. Counter to these propositions, this study develops theoretical arguments that a firm’s existing CEO is better equipped to foster corporate entrepreneurship and that this probability increases when the CEO’s cash compensation is decreased. Results from a sample of 100 single-product manufacturing firms suggest firms that retain their current CEO and decrease the CEO’s cash compensation are most likely to engage in corporate entrepreneurship. Implications that this research has for corporate entrepreneurship, corporate governance, and firm performance are discussed.

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