CEO Identity and Labor Contracts: Evidence from CEO Transitions

Bach Laurent, Serrano-Velarde Nicolas
This paper assesses how CEO transitions shape labor contracts within firms. We argue that family links between a new CEO and his predecessor act as a commitment device for upholding implicit contracts with the workforce. Consistent with this view, we find evidence of a wage insurance mechanism during a CEO transition. Dynastically-promoted CEOs relative to external CEOs are associated with up to 25% less job separations and 20% lower wage growth. Crucially, we show that differences, in terms of job separations, between dynastic and non-dynastic CEO successions are significantly greater when labor markets are more frictional.
BACH, L. et SERRANO-VELARDE, N. (2015). CEO Identity and Labor Contracts: Evidence from CEO Transitions. Journal of Corporate Finance, 33(1), pp. 227-242.