行政院國家科學委員會專題研究計畫 成果報告
家族繼承者對創新績效的影響
研究成果報告(精簡版)
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Family Succession-CEOs and Innovation Performance
ABSTRACT
CEOs may be important to organizational performance, but organizations often have to cope with the challenge of managing the process and consequences of CEO succession. Although numerous scholars have studied CEO succession, so far the evidence regarding the relationship between organizational consequences and CEO succession are inconclusive. However, CEOs have a strong impact on a firm’s innovation because they are the people who direct companies and control the strategy as well as structure of a firm. This study intends to clarify the inconclusiveness at to how succession-CEOs affect firm value, principally through the channel of a firm’s innovation activities.
The results of our analysis show that external succession-CEOs performed better in innovation activities. Moreover, after further classifying internal succession-CEOs into family and unrelated succession-CEOs, I found that firms with an unrelated internal succession-CEO experienced higher stock market reactions than those with family succession-CEOs, but lower reactions than those with an external succession-CEO. In addition, it was also discovered that for firms with family succession-CEOs, CEOs with lower capabilities experienced lower stock market reactions than those with higher capabilities. Furthermore, for firms with family succession-CEOs, the positive effect of a founder-CEO who still served in the company on stock market reactions is stronger than it is for those who did not serve in the company.
Family Succession-CEOs and Innovation Performance
1. INTRODUCTION
Chief executive officers (CEOs) are critical in an organization because they are the people who can direct companies and control the strategy and structure of a firm. Although CEOs play a role as important organizational resources, organizations have increasingly faced the challenge of managing the process and consequences of CEO succession (Cao, Maruping and Takeuchi, 2006). While prior studies have developed a substantial base of knowledge about the performance consequence of CEO succession, as well as stock market reactions to CEO turnover, the evidence regarding the organizational consequences of CEO turnover and new CEO origin (whether the new CEO is hired from outside or inside the firm) has been mixed (Karaevli, 2007; Cao, et al., 2006; Shen, and Cannella, 2002)1. To better understand the influence of a succession-CEO, a deeper analysis is needed to understand the channels through which business succession influences firm performance. This study attempts to contribute to this line of research by studying the influence of a succession CEO on corporate innovation. In particular, this study will further investigate whether a family succession CEO matters in the valuation effect of innovation.
The literature suggests that the capability of innovation is essential in creating competitive advantage and organizational success (Porter, 1985; Kanter, 1997). A CEO is the most important individual to affect the strategic orientation of a firm because an organization is often seen as reflection of its CEO (Hambrick, 2007; Schnatterly and Johnson, 2008). In addition, a CEO is also regarded as the head of the top management team, which implies that this person may possess strong control over the organization (Cao, et al., 2006). Therefore, a CEO with creative capabilities and attention could play a critical role in organizational innovation and thus encourage innovative activities of a firm (Amabile, 1997; Rothwell, 1992; Rubenstein, 1994; Bolton, 1993; Skyrme, 2000; Yadav, Prabhu and Chandy, 2007).
Although succession-CEOs have an important influence on innovative activities, the origin of a CEO could have a different effect on corporate innovation. Prior research suggested that an internal succession-CEO with greater knowledge of the firm, as well as established intrafirm networks, has a significant effect on firm innovation. However, internal succession-CEOs often face stagnation problems because they may offer fewer new ideas and hold relatively limited perspectives. In addition, they may also be overly committed to the status quo as well (Hambrick and Mason, 1984; Hambrick, Geletkanycz and Fredrickson, 1993). Thus, executive succession by an outsider who is not bound to the current way of
1
Some studies have suggested that there is a dysfunctional cycle between CEO succession and organizational effectiveness, and many have argued that tensions and instabilities in leadership transition were associated with a decline of firm performance (Breatty and Zajac, 1987). Others suggested that there is little or even no
operating and managing within the firm is more likely to search for a new organizational domain and enhance innovation (Shapria Cannella and Lubatkin, 1993; Newman, 2000).
In addition, family businesses are prevalent around the world (Faccio and Lang, 2002; La Porta, Lopez-De-Silanes and Shleifer, 1999; Neubauer & Lank, 1998). Prior studies suggested that such firms are often affected by nepotism problems when selecting successors to the CEO position. Thus, in these situations, a firm may have more of an opportunity to promote family members to the position of CEO (Weidenbaum, 1996). Nevertheless, a family succession-CEO may have a different effect from an internal professional CEO because of the unique nepotism problem in the family business. Thus, in this study, insiders were further classified into unrelated internal succession-CEO and family succession-CEO to investigate whether both types of successors have different repercussions on innovations.
The events of new product announcements made by Taiwanese firms were collected to test the hypotheses. This sample provides an ideal setting for my study for two reasons. Firstly, family succession is common in Taiwan. With strong family ties, top management officials of Taiwanese corporations often have a preference for relatives over professionals (Weidenbaum, 1996; Yen 1994). Second, innovation plays an important role in Taiwan’s industries. The electronics industry alone accounted for 78% of total profits of firms listed in the Taiwan Stock Exchange in 2008. The computer and computer peripherals, telecommunications and electronics industries all together accounted for 45.3 percent of Taiwan’s total exports in 2008. Additionally, the shipment volume of LCD monitors, netbook PCs, notebook computers, digital cameras and computer motherboards were ranked first in the world in 20082. Consequently, the unique characteristics of Taiwanese firms provide an appropriate sample for testing the effect of succession-CEOs on the value creation of innovation.
This paper proceeds as follows. Section 2 discusses the theoretical background. Section 3 shows the sample selection and methodology. The empirical results are presented in Section 4, while Section 5 offers the conclusions.
2. BACKGROUND AND HYPOTHESES
2.1 The Effect of External Succession-CEOs on Corporate Innovations
CEOs are important to an organization since they set the path for the firm’s strategic direction to innovative activities by coordinating knowledge and information flow within
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The data of Taiwan’s exports was collected from the Summary of Explanation of Exports and Imports, Department of Statistics, Ministry of Finance, Taiwan R.O.C., and the data of shipment volumes of LCD monitors and notebooks including oversea shipments was from the Information Industry Yearbook, Market Intelligence Center, Institute for Information Industry, Taiwan R.O.C.
organizations (Barnes and Hershon, 1976; Finkelstein and Hambrick, 1996; Hambrick and Mason, 1984). Moreover, the capabilities to garner the cooperation of employees and manage information flow as well as organizational resources throughout the organization are important for innovation (Amabile, 1997; Pollack, 1985; Karaevli, 2007).
The network perspective suggests that internal succession-CEOs often have long-term established relationships with other organization members. As a result, they possess a great deal of knowledge about organizational members, which can not only extend trust, but also lead the information flow, such as the innovative vision of a CEO, to move more efficiently throughout the organization (Cao et al., 2006). Moreover, internal succession-CEOs know the firm well and may have already participated in a firm’s strategic development, which means they are likely to have the ability to lead a firm’s CEO transition smoothly and stably (Lauterbach, Vu and Weisberg, 1999). This can also encourage employees to have mutual trust and be willing to exchange their intrinsic knowledge in order to promote innovative activities (Shapira, 1995). In addition, based on long-term established intrafirm networks, an internal successor can also discover advantageous new resources, which can be realized by combining existing knowledge with creative new ideas, thus enhancing innovative capabilities (Cao et al., 2006; Grant, 1996; Kogut and Zander, 1992).
However, the upper echelon perspective argues that the longer the tenure within the firm, the more likely an internal succession-CEO will suffer from the problem of strategic inertia, narrow perspective and intention to maintain the status quo (Hambrick, Geletkanycz, and Fredrickson, 1993; March and March, 1977; Katz, 1982). Long tenure within the organization may not only lead the internal succession-CEO to avoid making necessary changes for the firm but also entrench social relationships within the firm (Finkelstein and Hambrick, 1990; Gabarro, 1987; Wiersema and Bantel, 1993). For example, with long-term established relationships within the firm, internal succession-CEOs may be selected because of their closer relations with the board members, despite the fact that an external succession is optimal (Lauterbach, Vu and Weidberg, 1999). Compounding the problems of narrow perspective, intention to maintain the status quo and social relationship entrenchment, an internal succession-CEO may be inclined towards high homogeneity, but not value-enhancing innovative projects.
External succession-CEOs from outside the firm often have different views as well as diverse backgrounds, in contrast to incumbent management, and may not stick with the current mode of operation and management within the firm. Therefore, an external succession-CEO would be more likely to search for a new business domain and break the status quo (Hambrick et al., 1993; Bailey and Helfat, 2003). Prior research suggested that only companies that are able to continuously introduce new energy into the firm would be able to survive in the turbulent industrial environment (Chung and Rogers, 1987). An external
succession-CEO who is not bound to the old polices and implicit contracts of the firm can help bring the firm new perspectives, fresh ideas and thus promote attractive innovative projects (Lauterbach, Vu and Weisberg, 1999).
Therefore, the arguments above suggest the following competing hypotheses:
Hypothesis 1-a: Firms with an external succession-CEO experience higher stock market reactions to innovation announcements.
Hypothesis 1-b: Firms with an internal succession-CEO experience higher stock market reactions to innovation announcements.
2.2 The Effect of different types of internal Succession-CEOs on Corporate Innovations
Prior studies often dichotomize CEO successors into insiders who are promoted from within the firm and outsiders who are recruited from other originations (Kesner and Daton, 1994; Wiersema, 1995; Zajac, 1990). However, the appointment of an inside successor may involve the unique nepotism problem inherent in the family business - a prevalent organizational form worldwide (Weidenbaum, 1996)3. Because a family often has tight control of a firm, a family business may have great potential to promote family members to the position of CEO. According to the dichotomous classification of prior research, family members who have working experience within the firm and are promoted to CEO would be categorized as inside successors. Nevertheless, appointing family descendants to be a CEO limits a firm to a restricted labor pool, which is generally not as talented as the pool including non-family professionals4. Thus, this study further classifies insider CEOs into unrelated internal succession-CEOs and family succession-CEOs, in order to examine how these different types of internal succession-CEOs affect the performance of corporate innovation.
Prior studies suggested that the selection of a family succession-CEO would often entail the problem of nepotism in a family business (Schulze, Lubatkin, Dino and Buchholtz, 2001; Schulze, Lubatkin and Dino, 2003; Lubatkin et al., 2005). The nepotism problem arises because parents have an incentive to be kind to their children, based on the inherited household relationship. In addition, founder-CEOs often face the dilemma of choosing between hiring an incompetent relative and breaking up relations with some family members (Lansberg, 1983). As a result, strong family ties lead to a preference for relatives who may be
3
Family businesses, which account for some 70 percent of GDP and employment in the global economy, represent a significant proportion of businesses in Asia and Europe (Faccio and Lang, 2002; La Porta, Lopez-De-Silanes and Shleifer, 1999; Neubauer & Lank, 1998). Even in the United States about one third of publicly held firms were classified as family businesses (Anderson and Reeb, 2003).
4
Morck, Strangeland and Yeung (2000) suggested that the ability of family management is inferior to that of professional management on average.
incompetent and untrained over outside professionals (Weidenbaum, 1996)5. Moreover, if the labor pool is limited to family members, a firm is likely to be exposed to the risk of hiring unqualified individuals (Gersick, Davis, Hampton and Lansberg, 1997; Lubatkin et al., 2005; Perez-Gonzalez, 2006). When a family potentially uses its voting power to appoint unqualified descendants to the CEO position, the suboptimal choice of family succession-CEOs could expose a firm to the risk of selecting unfavorable innovation (Perez-Gorzalez, 2006).
However, professional managers are not only often products of a competitive labor market, but also possess the capabilities to lead a firm towards the strategic development routes of growth and expansion (Dyer, 1986; Hall and Nordqvist, 2008). Thus, it is easier and more efficient to promote qualified and capable candidates to the CEO position from the professional labor market than it is from within a family (Lin and Hu, 2007). For example, a professional manager could be selected because of the so-called “capabilities resources,” which are a high level of professionalism, skill and competencies (Klein, 2000). Thus, it can be expected that investors will prefer the innovation performed by an unrelated succession-CEO to that of the family succession-CEO. The study by Dyer (1986) suggested that professional management is a rational alternative to nepotism, which often plagues a family business. Lin and Hu (2007) also found that professional CEOs could help a family firm’s performance. Smith and Amoako-Adu (1999), who studied the effects of senior management turnover for Canadian family-controlled firms, found that when family successors are appointed, stock prices decline. In addition, the study of Perez-Gonzalez (2006) found that firms promoting family members as succession CEOs are more likely to underperform.
Hypothesis 2: Firms with a family succession-CEO experience lower stock market reactions to innovation announcements than those with an unrelated succession-CEO.
2.3 The Moderating Effect of Succession-CEOs’ Capabilities
To maintain a firm’s prospects, the board often makes great efforts to search for an adequate successor. The high competition for the CEO position for both internal and/or external candidates can lead a firm to have a greater pool of qualified candidates. Nevertheless, the nepotism problem is perceived to be the reason why families hand over their businesses to their family members. Strong family ties often lead a firm to have a preference for incompetent and untrained relatives over outside professionals, which limits CEO candidates to a small pool of family members (Weidenbaum, 1996; Yen, 1994). Failing to promote a qualified family CEO could potentially damage a firm’s innovative performance
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(Perez-Gonzales, 2006). Moreover, it is possible that a family CEO may also have formal business training such as an MBA, as well as experience as a professional manager (Hall and Nordqvist, 2008). Previous studies suggested that a family heir with a high level of education provides a signal to stakeholders that he or she could potentially have better ability as a CEO, which would lead to improved performance (Ben-Amar and Andre, 2006). Thus, when a family succession-CEO has a high level of education, he or she may have more of an ability to learn and adopt a family’s idiosyncratic knowledge to invest in value-creation innovation.
In addition, the experience of a successor is also positively related to the performance of the company, as this factor is a strong measure of the human capital of individual managers (Smith and Ben Amoako-Adu, 1999). For instance, when a family succession-CEO has senior management experience in the company, he or she may have more resources to coordinate relations and transmit knowledge both within and outside an organization, thus affecting the firm’s innovative performance. If a firm has a succession-CEO with high capabilities, stakeholders will reflect favorably to the guidance of a competent CEO towards value-enhancing innovative investments. Furthermore, if family CEOs are well educated or have experience in the company, they could have the capabilities to use idiosyncratic family knowledge transferred from the founder-CEO to create innovative opportunities. Thus, it could be expected that the stock market reactions are higher because investors may prefer innovation performed by such firms. On the contrary, when a firm has a succession-CEO with low capability, this in turn reflects the notion that the firm may not have the ability to pursue value-enhancing innovative projects. Therefore, it could be expected that the stock market reactions to such a firm investing in innovation activities will be lower. The study of Perez-Gonzales (2006) indeed found that a firm with a family succession-CEO who did not attend a selective college experienced lower profitability. Therefore, the following hypothesis is established:
Hypothesis 3: Family succession-CEOs with lower capabilities experience lower stock market reactions to innovation announcements than those with higher capabilities.
2.4 The Moderating Effect of a Founder-CEO
A founder-CEO possessing strong personal values has a strong impact on organizational strategic choices, and thus affects firm performance (Kimberly, 1979; Hatton and Raymond, 1994; Ling Zhao and Baron, 2007). Prior studies argued that with the characteristics of collectivism and novelty, which are important elements in founder’s value and have strong beneficial effects on firm’s performance, a founder can establish and operate a firm effectively (Ling-Zhao, 2007). Collectivism is referred to as the grouping of personal
interest and goals with the importance of sharing, cooperation and group harmony (Morris and Davis, 1994). Novelty is referred to as the tendency to value change, such as the new and the different, which can enhance a firm’s innovative capabilities and creative decision-making (Ford and Gioia, 2000). Both collectivism and novelty have substantial effects on the innovative activities within a firm that require creativity and cooperation with others. For example, a founder who promotes the notion of cooperation with others enhances employees’ mutual trust, and thus encourages employees to exchange personal intrinsic knowledge toward the value-enhancing innovation (Shapira, 1995). The novelty value of a founder can guide a firm to make innovative decisions and differentiate its products from competitors (Finkelstein &Hambrick, 1996). In addition, when a founder is visible in the organization, he can also serve as a focal point of personal specific stature, knowledge, and experiences for the succession-CEO (Nelson, 2003).
However, the role of a founder-CEO may be more profound in a family firm due to the embedded parent-child relationship. When family firms grow over time, severe disagreements may surface among the family members (Nahm, Vonderembse & Koufteros, 2003). For instance, family members often compete for the leadership position in the company. As a result, investment plans are often not unanimous among family members, which could seriously affect effective decision-making of the firm, and thus, firm performance (Chittoor and Das, 2007). A family founder-CEO not only possesses the intrinsic knowledge and vision that helped found the firm, but also holds a position of authority and respect within the family as a patriarchal figure. Based on the patriarchal situation, these types of conflicts are often mitigated. Thus, the leadership assets that a family founder-CEO possesses, as well as the presence of a founder-CEO within the firm, may have a great effect on innovation performance.
Unlike other firms, family firms are often highly idiosyncratic (Williamson, 1979). Such idiosyncratic knowledge in a family firm is often associated with individual specific characteristics of the founders (Castanias and Helfat, 1991, 1992). Based on the family relation, a founder-CEO may be more willing to guide a family successor towards retaining such idiosyncratic knowledge. When a business is handed over to family successors, family founders can play a sustained and important role in guiding the behavior for a family succession-CEO (Gimeno, Folta, Cooper and Woo, 1997; Vesper, 1996). Moreover, prior studies also suggested that companies run by founder-CEO’s outperform the sectoral average profitability, since a founder's superior talent could be a critical factor for a firm’s performance. However, the idiosyncratic knowledge of founder-CEOs is not easily partitioned or transferred to individuals or across organizational boundaries (Alchian, 1965). For example, while a founder-CEO can sell his business, it would be difficult to sell his tacit assets, such as his individual capabilities, knowledge or reputation (Fan, Jian and Yeh, 2008). Thus, it may not be easy to transfer a founder-CEOs’ idiosyncratic knowledge to a
succession-CEO (Coopey, 1987; Woodman and Schoenfeldt, 1990).
Thus, if a firm has a family succession-CEO and the family founder still serves in the company, the firm can be expected to have sustained guidance and idiosyncratic knowledge from the family founder in innovation activities. This could lead investors to react favorably to the innovation performed by such firm. On the other hand, if the family founder leaves the firm, investors may respond unfavorably, as without the founder’s value, guidance role and personal idiosyncratic knowledge, the firm’s overall competence may diminish, and thus affect the efficiency of the firm’s innovation. As a result, investors may expect innovative performance performed by succession-CEOs to be worse after founder-CEOs depart the firm. Hillestad, Xie and Haugland (2010) suggested that founders play an important role in building the firm’s reputation in a favorable way, and thus have a positive impact on how external constituents assess the image of the company’s innovations. However, Cucculelli and Micucci (2008) suggested that there was no inherent superiority to a family succession CEO. Therefore, the following hypothesis is established:
Hypothesis 4: Family succession-CEOs with a founder-CEO who does not serve in the company experience lower stock market reactions to innovation announcements than those with a founder-CEO who still serves in the company
3. METHODS 3.1 Sample Selection
In order to investigate whether a succession-CEO affects stock market reaction to innovation announcements, the focus of this study is on innovative announcements after succession. Thus, a sample of innovation announcements was collected from the news databank of the Taiwan Securities and Futures Institute Database (TSFID), which provides news-service abstracts from major Taiwanese newspapers. Based on Damanpour (1991), Zahra et al. (2000) and Hayton (2005), corporate innovations include such activities as the introduction of new products and new services. This study will utilize the keywords of “new
products” and “new services” in order to search for corporate innovation activities. The
sample of this study, product innovations were new products or services introduced to meet an external user or market need. The sample period is from 1998 to 2010.
To avoid the problem that repeated announcements might bias the results, when repeated announcements were found, the announcement on the earliest date was kept in the sample. The announcement date (day 0) was defined as the date of publication in which the company’s initial announcement appeared. To control the possibility of information leakage those announcements that appeared in the news up to one year before the announcement dates were deleted. Furthermore, to avoid confounding effects, observations were also deleted if other major announcements occurred 30 days before and after the event day. Finally, the
ticker of each sample firm from the news databank articles were matched with the corresponding one in the Taiwan Economic Journal (TEJ) Data Bank, while sample firms were excluded if their stock price information or financial data was not available in the TEJ. Data concerning family voting rights was obtained from the TEJ Data Bank.
Following these procedures, the final sample was comprised of 512 innovation announcements made by 132 Taiwanese firms, which represented more than 13 industries based on the two-digit industrial codes from Taiwan Stock Exchange (TSEC). Table 1 reports the distribution of the sample by year and industry. The results in Panel A show that the largest number of announcements introduced in 2009 was 119 (23.24%), followed by 73 (14.26%) in 2008. Panel B shows a high percentage of announcements were from electronics (64.84%), following by chemical (8.98%), and food (6.64%).
3.2 Measuring Stock Market Returns
The standard event-study method was used to examine stock price responses to announcements of innovations. The measure of abnormal stock returns in relation to innovation announcements follows Brown and Warner (1985) by using the market model to obtain estimates of expected returns. The market model depicts the return on a security as varying with the market portfolio return, which is adjusted for the security’s risk factor. That is,
E (Rit It-1, Rmt) = i + iRmt
where E (Rit It-1, Rmt) is the expected return on the ith firm at time t, given the available
information (It-1). The return on the market portfolio (Rmt), i measures the risk or sensitivity
of the firms’ returns relative to the market portfolio, while i is the intercept. The daily
abnormal return is calculated as the residual from the actual return and an expected return generated by the market model, with parameters, i and i, estimated over a period from 210
to 11 days before the initial announcements. The value-weighted Taiwan Stock Exchange All-Share Index was used to measure market return. Daily stock return information was from the Taiwan Economic Journal (TEJ) Data Bank. The cumulative abnormal return, CAR (a, b), for each security was measured by the sum of the abnormal returns over the window period between day a and b.
3.3 Independent Variables
3.3.1 Succession-CEO
Following the definition of Worrell et al. (1997), an external succession-CEO was defined as an outsider who was not employed by the company before acceding to the CEO position. The dummy variable of external succession-CEO equaled 1 if the succession-CEOs were outside members, and zero otherwise. This paper further investigated the influence of both unrelated and family succession-CEOs on stock market reactions to innovation announcements. Following Perez-Gonzalez (2006) and Yeh (2005), a family succession-CEO was classified as a CEO related by blood or marriage to the departing or the founder CEO of
a controlling family. These families are also often those with the largest voting shares when adding direct and indirect voting rights (La Porta et al., 1999; Yeh and Woidtke, 2005; Ben-Amar and Andre, 2006). In this study, the dummy variable of Family Succession-CEO equaled one if the succession-CEOs were a family member, and zero otherwise. In addition, the succession-CEO who was employed by the corporation was classified as an unrelated
internal succession-CEO. An Internal succession-CEO was defined as a CEO position held
either by a family succession-CEO or unrelated internal succession-CEO.
3.3.2 Succession-CEOs’ Capabilities
Following Ben-Amar and Andre (2006), and Smith and Ben Amoako-Adu (1999), a succession-CEO’s capability was measured by whether a family-succession CEO was well educated and had experience in the company. Well educated here means if the succession-CEOs had obtained a master’s degree while the CEO’s experience was measured by whether the succession-CEO had experience related to a senior management position prior to succession. In the sample, all succession-CEOs had experience in senior management prior to succession. Thus, the succession-CEO with higher capability was equal to one if a succession CEO has a master degree, and zero otherwise (succession-CEO with lower
capability).
3.3.3 Founder-CEO
Family successors may more easily facilitate firm-specific investments or coordinate and transmit knowledge within organizations for value-enhancing innovation if the founder CEO still serves in the descendent-controlled firm. McConaughy et al. (1998) suggested that the founder coefficient should be positive, as the descendent-controlled firms tend to be more efficient. Thus, it could be expected that the coefficient of the variable,
Founder-CEO, will be positively associated with stock market returns to innovation
announcements for firms with family succession-CEO. The variable Founder-CEO was equal to one if the founder serves in the descendent-controlled firms in the year preceding the innovation announcement, and zero otherwise (non Founder-CEO).
3.4 Control Variables
To control for other factors that may affect stock market reactions to innovation announcements, a set of explanatory variables, which have been known to have influential effects on innovation announcements, were included. First, firm size has been found to be important in explaining variations in stock market responses (Kelm et al., 1995; Chen et al., 2002). Unlike large firms, small firms are more source-constrained and vulnerable to market competition. The future streams of cash flow coming from new products would thus be more valuable to small firms (Chaney et al., 1991). In this study, Firm Size was measured by the natural logarithm of the book value of assets one year before innovation announcements. Second, firms with more free cash flow might choose a capital structure with higher levels of
debt as a credible pre-commitment to pay out the excess cash flow, hence lowering the expected costs of free cash flow (Jensen, 1986). This implies a positive relationship between a firm’s debt ratio and the abnormal returns of innovation. In contrast, overhang debt might prevent a firm from raising funds to finance positive NPV projects (Phillips, 1995; Stulz, 1990). I measured Debt ratio as the ratio of the book value of total debt to the book value of total assets one year prior to the announcement (Chen et al., 2002; Chen & Ho, 1997). Third, some researchers have suggested that high-newness innovation is expected to create better opportunities for product differentiation and competitive advantage (Kleinschmidt & Cooper, 1991). Therefore, high-newness innovation should receive a larger market value than updates of existing products. The variable newness equals one if the innovation is highly innovative, and zero if it is an update or an enhancement of an existing innovation.
Fourth, prior research has shown that past performance might be associated with the value of innovation (Zahra et al., 2000). Successful past performance provides more resources for firms to explore new strategy options and enhance innovation activities. Past
Performance was measured by the returns on assets one year prior to the announcements. In
addition, Family Ownership has an important impact on the valuation of a firm’s innovation activities (Chang, Wu and Wong, 2010). Following La Porta et al. (1999), Yeh and Woidtke, (2005), and Ben-Amar and Andre (2006), Family Ownership was calculated as the proportion of shares that are directly owned by the largest family in the target firm plus those that are indirectly held by the largest family through the control chain. Furthermore, technological
opportunity reflects the potential for future growth and innovation opportunities (Johnson,
Hoskisson and Hitt, 1993). Chaney et al. (1991), and Chen, Ho, Ik and Lee (2002) found that stock markets responded more positively to new products announced by firms with greater technological opportunities. Firms with greater expenditures on R&D may have greater inventive capability and technological opportunity (Burgelman and Maidique, 1989). Following Wu (2008), technological opportunity takes a value of one if the firm-level R&D intensity (R&D expenses divided by net sales) was greater than five percent and 0 otherwise. Finally, since the sample set was collected over a multi-year period, I also controlled for year effect.
The sample firms had 0.189 external succession-CEO, 0.313 family succession CEO and on average and 0.498 unrelated internal succession-CEO on average. CEO’s capabilities were 0.549 and founder CEO was 0.480 on average.
4. EMPIRICAL RESULTS
The results show that investors perceive innovations as value-increasing activities. For the two-day announcement period (days -1 to 0), the announcing firms experienced a positive average abnormal return of 0.735%, where a 1% confidence level is significant. No significant abnormal returns were observed preceding and following the announcement
period. As a result, this study used the cumulative abnormal returns over day -1 and 0 as the dependent variable in the regression analysis. The results of this study are consistent with prior studies (Chang et al., 2010; Chaney et al., 1991; Chen, 2008; Chen et al., 2002; Kelm et al., 1995).
To test the effect of succession CEO on stock market reaction to innovative announcements, in this study, the abnormal returns were compared based on different types of succession-CEOs. The results of this research show that the abnormal returns of firms with external succession-CEOs are significantly greater than zero. Moreover, the abnormal returns of firms with internal succession-CEOs are also significantly greater than zero. The difference test indicates that firms with external succession-CEOs experienced significantly larger abnormal returns than those with internal succession-CEOs. This result provides preliminary support for Hypothesis 1b, which states that firms with an external succession-CEO experience higher stock market reactions to innovation announcements.
Then, the impact of different types of internal succession-CEOs was further tested on corporate innovations. The internal succession-CEO firms were divided into family succession-CEOs and unrelated internal succession-CEOs. The evidence shows that the mean and median abnormal returns for family succession-CEOs are negative, but not significantly different from zero. The result of this study reports that family succession-CEOs experienced significantly lower abnormal returns than unrelated internal succession-CEOs. Thus, the evidence supports Hypothesis 2, suggesting that firms with unrelated internal succession-CEOs experienced higher stock market reactions than those with family succession-CEOs.
Next, I examined whether family succession-CEOs with lower capabilities experienced lower stock market reactions than those with higher capabilities (Hypothesis 3). This hypothesis was examined by utilizing a 2 × 2 table based on family succession-CEOs and CEO’s capabilities simultaneously.The figures shows that the mean abnormal returns (-0.860) and median abnormal returns (-0.717) of family succession CEOs with lower capability are significantly negative. The magnitude of stock market reactions for family succession-CEOs with higher capability is significantly higher than that for family succession-CEOs with lower capability. However, there is no significant mean and median difference in abnormal returns between the subsample for non-family succession-CEOs with higher capability and the subsample for those with lower capability subsample. This evidence implies that a CEO’s capability is valuable only for firms with family succession-CEOs, and thus preliminarily supports Hypothesis 3, which states that family succession-CEOs with lower capabilities experienced lower stock market reactions than those with higher capabilities.
Based on family succession-CEOs and founder-CEOs simultaneously, a 2 × 2 table was utilized to test Hypothesis 4, which predicts that for firms with family succession-CEOs,
the positive effect of a founder-CEO who still serves in the company on stock market reactions is stronger than it is for founder-CEOs who no longer serve in the company. The results show that in the subsample for firms with founder CEOs and family succession-CEOs, both the mean and median abnormal returns are significantly greater than zero. In contrast, the mean and median abnormal returns for the subsample of non founder-CEOs and family succession-CEOs are significantly less than zero. For the family succession-CEO subsample, the magnitude of abnormal returns for a founder-CEO is significantly higher than that for a non Founder-CEO. For the non-family succession-CEO subsample, however, the effect of a founder-CEO was insignificant. As a result, there is no mean and median difference in the abnormal returns between the “founder-CEO/non family succession-CEO” and “non-founder CEO/non family succession-CEO” subsamples. These findings suggest that for firms with family succession-CEOs, the positive effect of a founder-CEO on stock market reactions is stronger than that of a non founder-CEO on stock market reactions. Hypothesis 4 is thus supported.
Although the univariate results above support the hypotheses of this study, the tests did not control for other important determinants of market reactions to such announcements as suggested in prior studies. Therefore, in the cross-sectional regression analysis, the control variables were included to test if our findings were driven by some other important factors. In the regression analysis, I regressed cumulative two-day (days -1 to 0) abnormal returns of innovation announcements on independent variables. Among the control variables, firm size is found to be significantly negatively related to the market reaction to innovation announcements. This result suggests that the future streams of cash flow are from new products, and would thus be more valuable to either small firms (Chaney et al., 1991), or large firms, which are more closely followed by financial analysts and have less unanticipated information than small firms (Hertzel and Smith, 1993; Kang and Stulz, 1996). In addition, the coefficient of family-controlled ownership is significantly negative, indicating that innovation announcements by firms with more family-controlled ownership received more unfavorable market responses, consistent with Chang et al. (2010). Other control variables were not found to have significant explanatory power in terms of the variation in announcement of abnormal returns. Furthermore, the coefficients of CEO’s capability and Founder-CEO are significantly positive, suggesting that innovation announced by firms with a higher CEO’s capability and a founder CEO still serving in the company are therefore perceived as more worthwhile.
When I tested to see if a firm with an external succession-CEO creates more gains in innovation activities relative to those with an internal succession-CEO, the variable of
External succession-CEO shows a positive coefficient, and statistically significant at the 5
percent level. This result suggests that firms with an external succession-CEO experienced significantly higher stock market reactions, which confirm the findings in the univariate test
above. Thus, Hypothesis 1b is supported. Furthermore, I examined whether firms with a family succession-CEO experience lower stock market reactions, compared to unrelated family succession-CEOs. The dummy variable, family succession-CEOs, equaled one if the succession-CEO is a family member and zero otherwise. The result shows that the coefficient of family succession-CEOs is statistically negative. This evidence also confirms the findings of univariate analysis, suggesting that Hypothesis 2 is supported.
To test Hypothesis 3, the sample was divided into four categories, based on whether the succession-CEO is a family member and the CEO’s capability is higher or lower. The four separate categories include firms with a family succession CEO and a higher CEO’s
capability, firms with a family succession CEO and a lower CEO’s capability, firms with a non family succession CEO and a higher CEO’s capability as well as firms with a non family succession CEO and a lower CEO’s capability. The first category (firms with a family succession CEO and a higher CEO’s capability) will be regarded as the reference group and
the other three categories will be represented by separate dummy variables in the regression analysis. In regression analysis, I used these three dummy variables to test hypothesis 3, which states that for firms with a family succession-CEO, the negative effect of lower CEO’s capability on abnormal returns is stronger than that of higher CEO’s capability on abnormal returns. The evidence reports that the coefficient of a family succession CEO and a lower
CEO capability is negative and significant at 1 percent level. This implies firms with a family
succession CEO and a lower CEO’s capability experience abnormal returns that are worse than those for firms with a family succession CEO and a higher CEO’s capability. These results confirm the findings in univariate analysis, and Hypothesis 3 is thus supported.
To test Hypothesis 4, I also partitioned the sample into four categories, based on whether the succession-CEO is a family member and whether a founder CEO still serves in the company. The four separate categories include firms with a family succession CEO and a
founder CEO, firms with a family succession CEO and a non founder CEO, firms with a non family succession CEO and a founder CEO as well as firms with a non family succession CEO and a non founder CEO. The first category is regarded as the reference group and the
other three categories are represented by separate dummy variables in the regression analysis. I also used these three dummy variables to test Hypothesis 4, which states that for a firm with a family succession-CEO, the positive effect of a founder-CEO is stronger than that of a non founder-CEO on abnormal returns. The first dummy variable (firms with a family succession
CEO and a non founder CEO) takes the value of one if the succession-CEO is a family
member and the founder-CEO did not serve in the company in the year preceding the innovation announcement and zero otherwise. The second variable (firms with a non family
succession CEO and a founder CEO) takes a value of one if the succession-CEO is a non
family member and the founder-CEO still serves in the company in the year preceding the innovation announcement and zero otherwise. The third dummy variable (firms with a non
family succession CEO and a non founder CEO) takes a value of one if the succession-CEO
is a non family member and a non founder-CEO serves in the company in the year preceding the innovation announcement and zero otherwise. The results show that the coefficient of
firms with a family succession CEO and a non-founder CEO is negative and significant at a 1
percent level. This suggests that for firms with a family succession CEO, founder-CEOs experience lower abnormal returns than non founder-CEOs. These results also confirm the results in univariate analysis, and Hypothesis 4 is accordingly supported.
5. Discussion and Conclusion Discussion
While research on CEO succession has been extensive, the findings concerning the performance effect of insider and outsider succession is inconsistent (Shen and Cannella, 2002; Kenser and Sebora, 1994). In this study, the focus is on how the origin of succession-CEO affects the market value of innovation. In addition, family firms are prevalent around the world, especially in emerging markets. Prior studies suggested that a family firm might have different considerations in regard to the selection of a succession-CEO, due to the inherited nepotism problem of household relations. Thus, as there is a difference in the dichotomy of succession-CEOs into internal and external groups, I further classified internal succession-CEOs as unrelated internal succession-CEOs and family succession-CEOs, which could help to clarify how the internal succession-CEOs influence a firm’s innovation.
The results showed that family succession-CEOs performed more poorly in terms of innovation activities. This finding is consistent with the research of Cucculelli and Micucci (2008) and Smith and Amoako-Adu (1999) that a family succession-CEO had a negative impact on firm performance. Moreover, our results show that unrelated external succession-CEO experienced higher stock market reactions, which is consistent with the findings of Huson, Malatesta, and Parrino (2004), and Parrino (1997) that when the successor CEO was hired externally, she or he could bring new perspective and knowledge to the firm. The results also suggested that unrelated internal succession-CEOs might suffer from the problem of stagnation due to their long tenure within the firm, or the problem of banding with the existing social relationships within the firm.
This study also confirms the study of Perez-Gonzalez (2006) that family succession-CEOs who did not have a good education underperformed while the education degree of non family-succession CEOs did not predict decline in post succession performance. The evidence that a founder-CEO who still served in the company has a stronger impact on the innovation which is performed by a family succession-CEO also confirms the studies of Redding, Norman, & Schlander (1994) and Westwood and Chan (1992) that due to the effect of paternalism and embedded household relationship, the family founder-CEOs may be more likely to provide support, protection, and care to their subordinates.
This study presents two avenues for future research. First, this research focused on the effect of CEO origin on the stock market reactions to corporate innovation. Future studies could revisit this issue by investigating how CEO origin affects long—term performance of a firm’s innovation. Second, I found that founder-CEOs who still served in the company played an important role in the innovative projects performed by family-successions CEOs. Future studies could attempt to investigate how the specific assets or idiosyncratic knowledge that founder-CEOs possess affect a succession-CEO and innovation performance.
Conclusion
This paper examines the importance of succession-CEOs in explaining the stock market reactions to innovative performance. Using innovative announcements from the period 1998-2010, it was initially determined that firms with an external succession-CEO experienced higher stock market reactions to innovation announcements than those with an internal succession-CEO. Second, firms with a family succession-CEO experienced lower stock market reactions to innovation announcements than those with non-family succession-CEOs. Third, firms with an unrelated internal succession-CEO experienced higher stock market reactions than those with family succession-CEOs. In addition, for firms with family succession-CEOs, CEOs with lower capabilities experienced lower stock market reactions than those with higher capabilities. Furthermore, the positive effect of a founder-CEO who still served in the company on stock market reactions is stronger than it is for those who did not serve in the company. Finally, these results hold even after controlling for other variables that are found important in influencing the market reactions to innovation announcements.
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國科會補助專題研究計畫項下出席國際學術會議心得報告
日期： 2010 年 11 月 5 日一、參加會議經過
今年
Institute for Strategy
第一次舉辦關於亞洲議題的國際研討會， 主要由學術先進參與之外，也邀請並開放許多實務業界傑出人士參與討論 相關亞洲國家議題，如近幾年經濟快數發展的中國與印度的議題，該研討 會希望結合學術與實務，期望發揮使學術可更貼近實務並發展相關學術議 題的綜效。該研討會包含 Leadership；Climate Change & Sustainability； investment opportunity in Asia；Asian Retail Revolution；Understanding Asia Consumers；Future sourcing from Asia；Doing business in China、India 與 Japan；China-India Strategy；Innovation
計畫編號
NSC 99－2410－H－151－001
計畫名稱
家族繼承者對創新績效的影響
出國人員
姓名
翁鶯娟
服務機構及
職稱
國立高雄應用科技
大學
會議時間
2010 年 10 月 28 日 至 2010 年 10 月 29 日會議地點
印度新德里
會議名稱
(中文) 亞洲策略研討會
(英文)
Asia Strategy Forum
發表論文
題目
(中文)
影響企業採用綠色創新的內、外部因素-以投資中國為干擾因子
(英文)
External and internal factors affect on the adoption of green product innovation-The moderating effect of investment in China 附件四Strategy；SEM & Entrepreneurship；M&A；Competitive Strategy；CSR； CG…等重要亞洲議題。此研討會較特殊之處為邀請許多國際知名學者與公
司高階主管進行深入的討論與演講，例如， Ansgar Sickert (Fraport), Rajesh
Pillani (Harvard University), Bharat Bhatia(Motorala), Yogesh Kochhar(Microsoft), RS Dabas (JBM Group), Syed Abbas (AT&T), Henrik Palsson (Ericsson), Piyush Mathur (Nielsen Company), Jaswinder Ahuja (Cadence), Gautam Khanna (3M Healthcare), Mehmood Khan (Unilever) and Neeraj Mohan (Clinton Healthcare Access Initiative) 均參與個議程場次的討論與現況報告。本人參與的學術報 告安排在第二天，發表過程中，與會學者深入對我研究主題的構面與變數 提出中肯的意見，讓我有機會重新思考研究構面與變數的適切性。
