Section Five- Does the firm’s degree of diversification moderate the
CEO tenure and firm performance relationship?
These questions were addressed by examining the
succession of CEOs in 221 different firms. After the CEO
successions, the performances of the firms were measured by
return on assets over a three-year period. The study employed
controls for the circumstances of the CEO succession, the firm’s
performance prior to the CEO’s succession, firm size, and age
of the firm. CEOs were considered as outsiders if they had five
or fewer years of tenure with the firm at the time of
succession.^79
Interestingly, the results indicate that firms selecting CEOs
from the ranks of executives inside the organization or CEOs
with longer tenure experienced declines in their ROA during the
period after their selection. Furthermore, for firms having low
levels of diversification, the selection of outsiders or executives
with low levels of tenure was associated with increased ROAs in
the period after the CEO’s selection.^80 Thus, the study provides
strong evidence that better firm performance can be obtained
when the selection practices are coordinated or matched with
the firm’s strategy.