Why Do Firms Often Not Have a CEO Succession Plan?

We provide evidence that CEO succession plans reduce the losses associated with CEO turnovers and provide more accurate initial assessments of successors, especially when insiders are appointed, without negatively affecting firm performance when adopted or in place. Building on these findings, we develop and estimate a dynamic learning model featuring costly CEO turnover, plan adoption, and succession decisions. We find that succession plans offer substantial benefits, but boards of directors perceive them as costly. A reform mandating succession plans would increase shareholder value by 3%. The SEC’s 2009 policy shift on succession planning improved the adoption rate and succession outcomes.