Inside versus outside successions in the banking industry.

Williams, Thomas G.E. ; Her, M. Monica ; Larkin, Patrick J. 等

ABSTRACT

Our investigation of executive succession at major U.S. commercial banks identified differences between natural and forced successions. Investors responded more favorably to succession events when the new executive was hired from outside of the institution in forced successions. Similarly, forced successions were also viewed as wealth creating activities by the financial market. Notwithstanding the regulatory environment in which banks operate, the findings in this study are similar to those reported for non-banking firms.

INTRODUCTION

The replacement of the top executives of a firm is a significant corporate event that has economic implications for investors. Several studies have examined executive succession in industrial firms, with focus on the cause and consequences of the appointment of a new chief executive officer (CEO). Kesner and Sebora (1994) provide a comprehensive review of the executive succession literature. The evidence presented in this body of research suggests that the cause of a succession partly determine the new successor and the effect of the succession on the firm. Therefore, whether the successor is hired from within the firm or from outside becomes an interesting question.

Some qualities of the human capital critical to the successful operation of a firm are unique to the banking industry, because of the legal and regulatory environment in which banks operate. Regulation is a stated reason for omitting banking firms in earlier studies. Consequently, commercial banks are a fitting group of firms to investigate the implication of inside versus outside succession of top executives. This focus on banks is a fundamental difference from earlier studies that have examined industrial firms. The top executives of a banking firm, unlike their counterparts in industrial firms, must also be responsive to the concerns of government banking regulators. Therefore, a working knowledge of bank regulations has to be an integral component of the qualification of bank executives, if they are to be effective managers. To complicate matters more for bank executives, regulators also have a stakeholder interest in the safe and sound operation of these institutions. Notwithstanding these differences when compared to industrial firms, our evidence suggest that the implication of executive successions are quite similar. Investors in commercial banks also view executive succession as important events in determining the future prospect of banks. This was most pronounced at banks where the executives were forcibly removed from office. The evidence also suggests that the origin of the successor is of interest to both investors and bank regulators, particularly when the prior executive is forced from office.

Managers occupy the pivotal position between the claimants of a firm. Rosen (1992) suggests that managers' decisions have the greatest impact on the firm because of the multiplicative effect that their decisions generate down through the lower levels of the organization. Consequently, changes of personnel occupying executive positions should affect the firm in ways that have significant economic consequences. However, most of the published articles on executive succession appear in the management and behavioral science literature. They focus on the origin of successors (Cannella & Lubatkin, 1993; Dalton & Kesner, 1983; Davidson, Worrell, & Cheng, 1990;, and Rajagopalan & Datta, 1996)), and on socio-political factors (Zajac & Westphal, 1996, Cannella & Lubatkin; 1993; Weirsema, 1982; and Kesner & Dalton, 1994)) that affect the succession process. Still other studies such as Denis and Denis (1995), Kesner and Dalton (1994), Zajac (1990), and Reinganum (1985) have examined the relationship between succession and firm performance using both accounting and market measures.

In this study, we use market determined returns to measure performance, as the use of accounting performance measures, especially as they relate to managerial discretion, is widely criticized in the literature by scholars including, Healy (1985), Murphy (1985), DeAngelo (1988), Jensen and Murphy (1990), and Hubbard and Palia (1995). These authors correctly contend that managers can manipulate accounting results. Some studies including Barro and Barro (1990) and Chung, Lubatkin, Rogers, and Owers (1987) have found that executive turnover had no effect on accounting performance measures while having significant effect on market determined measures of performance. However, other studies including Weisbach (1988) and Denis and Denis (1995) have used accounting returns to measure performance and obtained results consistent with market-determined measures of performance. There is some evidence of inconsistency using accounting metrics in turnover studies. Even though banks are the subject of this study and they operate in a highly regulated industry compared to the industrial firms used in earlier studies, we use market returns as the measure of performance.

Using market returns, we estimate abnormal returns associated with the succession announcement by sample banks. Our results show that successors from outside the bank but from within the banking industry attract the most favorable market response for natural successions. However, successors from outside of the industry generate the highest abnormal returns for forced successions. We also find evidence that successions in which regulators are involved are more likely to result in the hiring of outside executives.

The remainder of the paper consists of four sections. Section two includes a review of the literature and provides the motivation for the study. A description of the sample and of how it was developed is presented in the third section. We develop the hypotheses and discuss our findings in section four. The paper concludes with a summary of our results.

LITERATURE REVIEW

The issue of executive succession has received much attention, particularly in the management literature, (Datta & Guthrie, 1994; Davidson, Worrell, & Cheng, 1990; Kesner & Sebora, 1994; Reiganum, 1985; Wiersema, 1992). The characteristics of the firms prior to and the circumstances of the succession seem to be the most extensively examined issues. In addition, all of these studies examine industrial firms, and provide evidence that is inconclusive on the effect of executive succession on the firm. Our study addresses two important questions. First, the origin of the new executive, and second the subsequent market response, are issues that have received much less scrutiny. Other studies that have looked at the issue of the origin of the new executive include Cannella and Lubatkin (1993), Dalton and Kesner (1983), Davidson, Worrell, and Cheng (1990), Parrino (1997), and Rajagopalan and Datta (1996).

Executive succession continues to generate interest in the business literature for a number reasons. First, the executives occupy a unique position in the corporation, which gives them tremendous influence over all of the firm's activities. Second, the agency problems that exist between managers and shareholders when the ownership and control of corporate assets are separated. Finally, the prior research has provided no unified evidence on the effect of executive succession on subsequent firm performance. An extensive survey of research that focuses on succession conducted by Kesner and Sebora (1994) covers 178 articles published since 1960. The studies included in the survey explore how socio-political factors, corporate strategy, industry differences, and firm performance are related to top executive succession. This study expands our understanding of the executive succession decision by providing an analysis of executive succession at commercial banks, a group of firms not examined in other studies.

The effect of socio-political and behavioral factors on the succession decision usually focuses on the relationship between managers and board members, to the exclusion claimants whose interest is primarily financial, such as shareholders. However, the financial performance of the firm may be affected by sociopolitical and behavior factors, as these factors impact the decisions made by top executives. Socio-political and behavioral factors are more remote from financial performance; therefore, they would tend to play a more significant role in natural successions such as the retirement of a CEO, where claimants with an economic interest in the firm are not necessarily involved. For example, the retirement of a CEO can generally be anticipated. This gives both the CEO and the board ample time to plan for and select a successor. It is widely reported that retiring CEOs prefer continuity, and therefore, want to play the major role in deciding whom their successor will be. Incumbent CEOs tend to prefer an individual more akin to himself or herself, usually an insider who the CEO has groomed for a number of years. Incidentally, the choice of an insider may also be in concert with the directors who may have had the opportunity to observe or even interact with this individual. The board as the final arbiter over the replacement decision, may support such a CEO-designated candidate, to reduce the search cost and eliminate the risk associated with hiring an unknown outsider.

A firm will not always hire an insider in a retirement succession, as the board may have an overriding interest in finding a new executive who is more reflective of the characteristics and philosophy of its members. Zajac and Westphal (1996) makes a persuasive argument that both the incumbent CEO and the board of directors are driven by a desire to hire new executives with demographic characteristics that are similar to themselves. These characteristics include their functional background, age, and educational background, and may have nothing to do with maximizing firm value. In a study of 232 successions at large U.S. firms listed in 1988 Forbes and Fortune 500 indexes, Zajac & Westphal find evidence that outside successors had demographic characteristics that were different from those of incumbents and more similar to those of the board members. However, the eventual successor, in some cases, depends largely on the relative power of the CEO and the board in the hiring decision. The influence of the CEO over the board is usually made evident by the presence of an heir-apparent. The CEO also holding the position of chairman of the board, the number of insiders on the board, and the ownership stake of inside board members are also reflective of the CEO's influence.

Cannella and Lubatkin (1993) investigated the relationship between firm performance and the likelihood of hiring an outside CEO. Poor firm performance, as measured by both accounting (ROE and adjusted ROE) and market returns, was shown to predict outside hiring. Yet the major contribution of their research was to show how sociopolitical factors alter the succession decision by reducing the likelihood of hiring an outsider when the firm has performed poorly. This provides evidence that the internal politics of the organization may directly impede the use of performance measures by directors to increase firm value.

In spite of the evidence that socio-political factors reduce the effectiveness of the board in the succession decision, directors still have the opportunity in a large number of successions, both natural and forced, to hire executives who could disrupt the status quo by changing the focus of the firm, adopting new corporate strategies, or undertaking a major restructuring of the firm. Wiersema (1992) addressed issues related to corporate focus and strategy in her investigation of a random sample of 146 of the largest U.S. manufacturing firms. She finds that changes in corporate focus and strategy are negatively related to the nature of the succession. Hiring of outside presidents is identified with the most significant changes in corporate strategy. She measured the change in corporate strategy by a change in the firm's specialization ratio. This measure restricted the sample to only multi-business firms. An increase in corporate control activities including asset sales, layoffs, and cost-cutting measures following top management turnover is reported by Denis and Denis (1995) and Weisbach (1995). Major organizational changes such as a change in the dispersion of power, increase flow of information, and more competitive aggressiveness was also found in an examination of CEO succession, conducted by Miller (1993) on a sample of 36 large U.S. corporations.

Succession events have the potential to create havoc on lower level employees and on the informal relationships they have developed over several years under the old managers. Kesner and Dalton (1994) reports higher than normal turnover among lower level executives following outside successions. These employees are apt to resist what they view as a disruption of the existing order in the organization and by so doing could negate the benefits from the transition to a new executive. Disruptive successions are more likely to be associated with forced successions and the hiring of outsiders. The chance of a successful transition can be severely impaired when successions are preceded by long-tenured CEOs who have developed strong bonds and an informal network within the organization.

Other studies that focus on firm performance and executive successions such as Denis and Denis (1995), Kesner and Dalton (1994), Zajac (1990), and Reinganum (1985) used both accounting and market measures of performance. Both Denis and Denis (1995) and Kesner and Dalton (1984) looked at the pre- and post-succession periods and used returns on assets to measure performance, however, Denis and Denis (1995) also used abnormal stock returns. The two studies predicted increased firm performance following successions preceded by poor performance. Poor performance preceded forced turnovers in Denis and Denis' (1995) study and is associated with increased managerial turnover in Kesner and Dalton's (1994) study.

Reinganum (1985) also finds a positive relationship between executive succession and post-succession performance, but only for outside successions at small firms. Internal successions had no effect on post-succession performance for either large or small firms. This is contrary to Denis and Denis (1995) who found internal successions were associated with positive stock price performance. Puffer and Weintrop (1991), using a sample of 53 turnovers that occurred during 1983, found no evidence linking either accounting or market performance to the likelihood of CEO turnover. However, they found that failure to meet analysts' forecast of earnings was a factor in determining executive turnover. Declining market share also appeared to have a positive effect on the likelihood of executive turnover. A number of studies including Denis and Denis (1995), Kesner and Dalton (1994), Warner, Watts, and Wruck (1988), and Weisbach (1988) seem to support the idea that firm performance played an important role in executive succession decisions.

The prior studies cover diverse aspects of the social science discipline, which necessarily involves several methodological approaches. These studies have applied qualitative and quantitative techniques to data generated by surveys and from secondary sources. In addition, the earlier studies excluded financial firms. This paper adopts a quantitative approach and focuses on objective economic analysis. Our central question is to assess whether commercial banks replace their top executives with insiders or outsiders and how investors respond to that choice.

DESCRIPTION OF SAMPLE

Our sampling period extends from 1983 through 1993. We selected the largest bank holding companies and commercial banks that are listed on COMPUSTAT, CRSP, and in the American Bank Directory. There were 246 banks that met this criteria in 1983 but only 145 of these banks remained independent at the end of the study period. The other 101 banks were either acquired or merged with other institutions. This is testament of the significant consolidation within the banking industry during the 1980s and continuing into the 1990s. All executives holding the titles of chairman, CEO, or president were recorded from the American Bank Directory published in the fall of each year from 1983 through 1993. Earlier studies used the Wall Street Journal (Reinganum, 1985; Warner, Watts, & Wruck, 1988; Davidson, Worrell, & Cheng, 1990; Denis & Denis, 1995; Cannella & Lubatkin, 1993), Forbes annual report (Parrino, 1997; and Zajac & Westphal, 1996)), and S&P's Register (Warner, Watts, & Wruck, 1988)) to compile their sample of executive successions. The fall directories report information as of June 30 each year. All instances where an officer holding any of the titles was not also reported as an officer in the publication for the prior year is recorded as a succession. Changes where one titleholder takes on an additional title or moves from one position to another such as the CEO taking on the additional title of chairman or the president becoming the CEO are not recorded as successions. Also not recorded as a succession are cases where an officer holding any of these three titles in one year is not listed with one of the titles in the following year, and no new replacement is identified. Therefore, all successions must involve someone that has taken on at least one of the titles of chairman, president, or CEO. For a succession to be recorded, a new executive must be promoted from a non-executive position within the firm or appointed from any position outside of the bank. A total of 235 successions and 259 successors were identified between 1983 and 1993. The greater number of successors is due to the fact that some successions involved more than one newly appointed executive. Comparing successive annual records of the officers holding executive positions at the sample banks identified these successions.

Next, we checked the Wall Street Journal and local, regional and national publications for public announcement of these successions. Announcements for 164 of the successions was identified in at least one of the following news outlets: Wall Street Journal, American Banker, The Financial Times, Reuters Financial Report, PR Financial News, Southwest Newswire, or United Press International. The information from these sources confirms the successors identified by tracking the annual fall issue of the American Bank Directory. Announcement of some successions was found in more than one news outlet, sometimes on different dates. In all cases, we recorded the earliest date of any of the public announcements. In many cases, the article containing the announcement also provided additional information that is used to classify a succession as either natural or forced. We also checked the various news outlets for the days immediately following the announcement for related articles that might provide additional information pertaining to the successions.

The origin of a successor was classified depending on whether the new executive was from within the bank or a subsidiary, from another organization in the banking industry, or from another industry (SIC not between 6000 and 6099). Successions involving former employees of a merged institution are recorded as insiders. The reason for the succession, whether natural such as death, retirement or advancement or when the executive was forced to leave was also recorded.

Outside successions include both those from other banking organizations and from other industries. The outsider group includes all appointments where the individual had served less than two years at the bank. Cannella and Lubatkin (1993) also used a two-year limit to classify outside successors. However, two earlier studies Davidson, Worrell, and Cheng (1990) and Chung, Lubatkin, Rogers, and Owers (1987) truncated the years of service with the new company at one year. Some earlier studies record as insiders, executives with either more than five or more than six years with the firm. For each firm involved in a succession, we extract data from COMPUSTAT tapes from CRSP data files.

Thirty-eight of the 259 successors held only the position of chairman. Executives holding only the title of chairman are likely to be heads who play no direct role in the management of the bank. Therefore, like Morck, Shleifer, and Vishny (1989), we checked the signatories to the annual reports for the year each executive holding only the title of chairman was appointed to that position. Sixteen of these chairman (only) successors did not sign the report, which suggests that they were not active participants in the day-to-day affairs of the bank. These 16 executives were deleted from the sample of executive successors that we use in the analysis. One other successor, Sidney Lassen, the chairman of Hibernia Corp was appointed in July 1991 but did not sign the annual reports for either 1990 or 1992. We could not locate the 1991 report so he too was dropped from the sample. The appointment of Terry Raymond, Jr., chairman of North Fork Bancorporation was announced in December 1987 but he signed only the 1988 report. Another chairman, John Adam Kanas, signed both the 1987 and 1989 annual reports. Terry Raymond, Jr., is retained in the sample of successors. The remaining sample includes 223 succession events and 242 successors reported in Table 1.

We are able to classify 150 or 62 percent of the successors in the sample based on their origin. One hundred and six of these successors, representing 71 percent of the sample are insiders and the other 44 representing 29 percent of the sample are outsiders. Cannella and Lubatkin (1993), Lubatkin, Chung, Rogers, and Owers (1989), and Shetty and Perry (1976) reported outside appointments at 11%; Beatty and Zajac (1987) 12%; Dalton and Kesner (1983) 16%; Kesner and Dalton (1994) 18%; and Reinganum (1985) 13% of the successions in their samples. The proportion of outside appointees reported in Table 2 is twice as great as the average of the percentage reported in these earlier studies. Nine of the outsiders are from an industry other than banking. This represents 20 percent of the outside successors, however, to our knowledge none of the earlier studies distinguished between outsiders from within and outside the industry. Seventy percent of the outside successions occurred in the 1990s, which suggest an increasing tendency for banks to hire outside executives during the later years of the period under review. These outside successions represent a total of 30 successors or 68 percent of the outside successors. Of the 242 successors, we found public announcement of appointments for 160 successors. This forms the base sample used in the remainder of the analysis.

HYPOTHESES AND DISCUSSION OF RESULTS

We adopt Fama's (1980) view of the firm as a nexus of contracts, which ties together groups of individuals as the most efficient mechanism to create wealth. The party to these contracts that is most often examined is the shareholders. The other groups include those who hold fixed or implicit claims against the firm, such as creditors, customers, employees, suppliers, and the communities in which the firm operates. Denis and Denis (1995) reported that 68% of the forced turnovers in their sample were at firms actively monitored in the year prior to the turnover by parties other than the board of directors. These parties included blockholders, other shareholders, creditors, and potential acquirers. Furthermore, 56 percent of the firms that experienced forced turnovers were also the target of some form of corporate control activity. In their study Davidson, Worrell, and Cheng (1990) included officers holding the titles of chairman, vice-chairman, CEO, and president, Wiersema (1992) considered only the president, and Warner, Watts and Wruck (1988) the titles of chairman, CEO, and president in identifying management turnover. Hambrick and Mason (1984) suggest that including the entire management team may strengthen the predictive value of the model. The managers of the firm administer the relationships between these diverse groups but hold primary responsibility to shareholders, though they may have incentives to renege on this obligation. Still, it is the shareholders, through an elected a board of directors that hire and replace the managers. Therefore, shareholders can offer incentives that should ensure that managers pursue policies consistent with the shareholders' interests. A manager is defined here as an officer holding any one or a combination of the titles of chairman, chief executive officer (CEO), or president. We restrict our definition of managers to the three titles that would represent only those senior executives with substantial participation in directing the affairs of a non-banking firm. This is most appropriate since banks are known to have a large number of other officers holding executive-type titles such as senior vice president, executive vice president and vice president.

Academics, including financial economists, are interested in the arrangements, which govern the manager's relationship with the firm because of the important position manager's hold in the organization. The most important issues are the selection, remuneration, and monitoring of the managers' activities to ensure that the objective of maximizing shareholders' wealth remains the focus. Studies by Jensen and Meckling (1976), Fama and Jensen (1983), and Shleifer and Vishny (1986) have examined the mechanisms that should align the interests of managers and shareholders.

An alternate approach focuses on the internal and external control mechanisms that serve to align the interests of shareholders and managers. One option among the internal control mechanisms is the ability of the board to replace the managers of the firm. Managers are replaced under three basic circumstances (a) natural, that is, upon the death, illness, retirement, or promotion of an executive; (b) at the initiation of claimants who want to change the direction or strategy of the firm; or (c) by outside parties who attempt to or acquire control of the firm. For the purpose of this study, we classify successions as either natural or forced. Forced succession includes those that were initiated by shareholders, creditors, the government, or outside investors. Warner, Watts, and Wruck (1988) omitted successions resulting from outside takeover of the firm from their sample; therefore, these successions are also excluded from their forced replacement set. The claimants initiating the replacement of managers are usually the shareholders, but in some instances creditors or implicit claimants may also exert some influence over the management succession decision. The replacement of the top executives at Cendant Corporation in 1998 represents an extreme case for forced action, where it was alleged that the officers committed fraud.

The origin of the successor, that is, whether the successor is an insider, from another organization within the banking industry, or from another industry is an important question raised in this study. The government as regulator holds a peculiar position in banking firms through a series of explicit and implicit contracts. This places the regulator in a unique position between creditors and the shareholders. The regulator's prime interest is the safety of the institution rather than profitability.

None of the earlier research we reviewed examined financial institutions as a separate group. Banks are an interesting set of firms to study executive succession because banking is a relatively homogeneous industry, banks employ human capital of a specialized nature, and they are extensively regulated. Furthermore, the production processes in the banking industry involve intangibles such as systems, procedures, and expertise that dominate in ways not present in manufacturing firms. All of these intangibles are directly related to human capital.

Successions initiated because of poor firm performance or regulatory actions are considered forced successions. These successions provide directors with the greatest leverage to initiate change through the selection of outside successors. Outsiders are more attractive under these circumstances because these candidates may possess characteristics that differ from those of insider candidates. Zajac and Westphal (1996) argue that there are also socio-political motives for directors to hire executives with characteristics that are different from those of the incumbent management. The perception that these new outside executives are more likely to take actions that will improve the fortunes of the firm is consistent with earlier studies such as Dalton and Kesner (1983), and Datta and Gutherie (1994) that have reported a positive relationship between poor performance and the hiring of outside CEOs. Therefore we predict that outside executive appointments will be associated with forced successions.

Forced successions reflect the stakeholders' displeasure with the performance of incumbent managers. Therefore, if directors are value maximizers, replacing these managers should lead to improved firm performance. Such successions should alter investors' expectation of the prospect for the firm, resulting in higher stock prices.

Thirty or 27 percent of the 111 successions that are reported in Table 3 were identified as forced successions, and twenty or 67 percent of these forced successions resulted in the appointment of outsider successors. On the contrary only 30 percent of the natural successions resulted in the appointment of outside successors. Similarly, as presented in Table 4, 66 percent of the 38 forced successors were appointed from outside compared to only 29 percent of the natural successors that were from outside of the firm. Consistent with our conjecture, the evidence indicates outsiders are hired when the stakeholders become dissatisfied with incumbent executives.

If forced successions are indicative of the claimants' displeasure with the management of the bank, then banks that forcibly remove their executives should record a positive stock price response. The abnormal return associated with forced successions was 3.12 percent, which is significantly higher than the 0.72 percent recorded for natural successions. The significantly positive response of the market to forced successions reflects investors' favorable assessment of the directors' decision to replace the executives. Investors also seem to concur with the decision to hire a new appointee from outside of the firm. The strong correlation between forced successions and the appointment of an outsider is also reflected in the significant abnormal returns recorded in Panel B of Table 5, for outside successions.

A succession is considered to have the regulator's input if it is a response to regulatory action or if there is any reference of regulatory pressure in the succession announcement or related published articles. The regulators are mostly concerned with the risk of the bank, and therefore, the impact of managerial decisions on bank risk. Regulators should advocate the hiring of new outside managers, since the basis for their concern can usually be linked directly to inept management. Regulators may also have some preference for industry experience, since the human capital acquired over years of dealing with banking laws and regulation may be critical to restoring the bank to a sound operation.

In light of the association between forced successions and the hiring of outsiders, ad the fact that successions in which regulators are involved are classified as forced, we would also expect regulatory successions to result in the hiring of outsiders. Recall from Table 3 that 75 percent of the regulatory successions involved outsiders and 83 percent of these outside successions were industry successions. The pattern is similar in terms of the actual number of successors reported in Table 4. Seventy-one percent of the 14 successors that were associated with regulatory induced successions were from outside the bank. While the primary focus of the regulators is to protect the insurance fund and depositors, and to maintain confidence in the banking system, we can glean some idea of how investors view regulatory induced succession by comparing the abnormal returns of banks where the regulators precipitated the succession to the abnormal returns associated with natural successions. The evidence presented in Panel C of Table 5 shows that, banks where the succession was the result of regulatory intervention the abnormal returns were 4.90 percent, which is significantly greater than the 0.72 percent recorded for natural successions.

The abnormal returns for banks with outside of the banking industry (non-industry) successions were greater than the abnormal returns for banks with inside successions and also for banks with industry successions. However, the differences are never at a level greater than the 10 percent level of significance.

Finally, we use two binary variables in a multivariate model to assess whether there is any association between the type of succession and the abnormal returns. The variable representing the type of succession is set equal to one if the succession is natural and zero for forced successions. The second variable is set equal to one if the successor is appointed from within the bank and equal to zero for outside hires. The regression results reported are in Table 6. Apparently, it is the type of succession that generated the significantly greater abnormal returns for some banks. The estimated coefficient for the type of succession is -0.024 and for the origin of the successor is -0.020, both significant at the 5 percent level. However, the significance of estimated coefficient for the binary variable representing the origin of the successors disappears when the type of succession variable is included in Model 3. With the estimate of the coefficient for the type of succession variable at -0.020 and significant in Model 3, we conclude that outside succession is the result of forced succession. Therefore, the abnormal returns we observe represent investors' approval of the replacement decision in forced successions, rather than the approval of the hiring of outsiders.

CONCLUSION

Some of the desirable attributes of top executives in the banking industry may differ from those of the executives at industrial firms, because of the regulatory environment in which banks operate. The regulators of banks also have a unique stakeholder-interest in protecting the interest of depositors, borrowers, the bank insurance fund, and providing for the stability of the financial system. In spite of these differences, our analysis of executive succession at U.S. commercial banks reveals evidence similar to those for industrial firms.

Banks that undertake forced successions experience substantially greater wealth gains than do banks with natural successions, which is consistent with the idea that poor managers were being replaced. Outside appointments that were not the result of forced successions also appeared to have being viewed more favorably by investors. This is reflected in a more favorable response from the market for natural successions when the new officers where employed from outside of the firm but from within the banking industry. However, for forced successions the market responded more favorably when the new successors came from outside of the banking industry. The difference in market response to the selection of outside successors for natural and forced successions suggest that when there was a problem with the incumbent management, the market was more willing to entertain appointment of officers without bank-specific experience. Any inference from this finding regarding non-industry successions must be tempered because of the relatively few observations for this category of successions. Regulatory involvement in the succession also appears to encourage the hiring of outsiders. Finally, further research may include an examination of the characteristics of the banking firms that influence how investors respond to executive succession.

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Thomas G. E. Williams, Fayetteville State University

M. Monica Her, California State University, Northridge

Patrick J. Larkin, Fayetteville State University

Table 1

Summary of executive successions at a sample of U.S. banks that
are listed by both CRSP and COMPUSTAT, and that are also recorded
in the American Bank Directory from the Fall of 1983 to Fall 1993.
The merged/acquired column represents banks dropped from CRSP
because they were involved in either a merger or an acquisition
during the corresponding or prior year (that is, between the
publication for two successive fall directories). The succession
events were detected and successors identified by comparing the
officers reported in each annual fall issue of the American Bank
Directory from 1983 through 1993. Inside successions refers to
the number of successions where at least one individual holding
the title of chairman, president, or chief executive officer was
appointed from within the bank or a subsidiary of the bank. Inside
successions also include cases where appointees at the surviving
bank were formerly employed by one of the banks involved in a
merger or acquisition. Industry represents successions where the
appointee is from another firm within the financial services
industry such as a commercial bank, S&L, or a bank regulatory
agency. Successions where the appointee is from a firm other than
a commercial bank, S&L, or a bank regulatory agency were recorded
as non-industry.

Year Merged/Acquired No. of Banks Successions Successors

1983 246
1984 11 235 24 28
1985 17 218 25 29
1986 11 207 21 19
1987 9 198 19 22
1988 11 187 30 34
1989 6 181 24 26
1990 8 173 23 24
1991 9 164 26 28
1992 11 153 16 16
1993 8 145 15 16
Total 101 145 223 242

Table 2

Summary of executive successors at a sample of U.S. banks that
are listed by both CRSP and COMPUSTAT, and that are also recorded
in the American Bank Directory from the Fall of 1983 to Fall 1993.
Inside successors include individuals holding the title of chairman,
president, or chief executive officer that were appointed from
within the bank or a subsidiary of the bank. Insiders also include
appointees at the surviving bank that were formerly employed at
one of the banks involved in a merger or acquisition. Industry
successors represent the appointees from another firm within the
financial services industry such as a commercial bank, S&L, or a
bank regulatory agency. Non-industry successors include appointees
from a firm other than a commercial bank, S&L, or a bank regulatory
agency. AD represents the number of successors for which an
announcement date is identified in at least one of the following
publications: Wall Street Journal, American Banker, The Financial
Times, Reuters Financial Report, PR Financial News, Southwest
Newswire, or United Press International.

Year AD Inside Outside Non-industry
 Industry Industry

1984 18 20 0 0
1985 18 13 0 0
1986 14 10 2 0
1987 13 11 3 0
1988 14 12 3 3
1989 16 7 2 1
1990 16 11 6 1
1991 26 12 7 2
1992 11 6 6 1
1993 14 4 6 1
Total 160 106 35 9

Table 3: Classification of Executive Succession Events

Summary of executive successions at a sample of U.S. banks that
are listed by both CRSP and COMPUSTAT, and that are also recorded
in the American Bank Directory from the Fall of 1983 to Fall 1993.
These successions have been classified as natural, forced, and
regulatory. Each succession is also identified by the origin of
the successor when there is only a single successor or if all the
successors for a given succession are of the same origin. Whenever
there is more than one successor for each succession and the
successors are of a different origin, no classification is made
as to origin. Therefore, the number of succession events reported
in this table will be less than that reported in Table 1.

 Origin Natural Forced Non- Forced Total
 Regulatory Regulatory

Inside 57 8 2 67
Industry 21 11 5 37
Non-industry 3 3 1 7
Total 81 22 8 111

Table 4: Classification of Executive Successors

Summary of executive successors at a sample of U.S. banks that
are listed by both CRSP and COMPUSTAT, and that are also recorded
in the American Bank Directory from the Fall of 1983 to Fall 1993.
These successors have been classified as natural, forced, and
regulatory. Each successor is also identified by their origin.

 Origin Natural Forced Non- Forced Total
 Regulatory Regulatory

Inside 59 9 4 72
Industry 21 11 6 38
Non-industry 3 4 4 11
Total 83 24 14 121

Table 5: Abnormal Returns Associated With Executive Succession

Summary of the two-day abnormal returns associated with the
announcement of an executive succession at a sample of U.S. banks
that are listed by both CRSP and COMPUSTAT, and that are also
recorded in the American Bank Directory from the fall of 1983
to fall 1993. These successions have been classified as natural,
forced, and regulatory. Each succession is also identified by
the origin of the successor when there is only a single successor
or if all the successors for a given succession are of the same
origin. Whenever there is more than one successor for each
succession and the successors are of a different origin, no
classification is made as to origin. The classification of
successions by origin include inside succession, if the executive
is promoted from within the firm, a subsidiary, or a merged firm;
industry succession, if the executive is from another bank, S&L,
or banking agency, and non-industry succession, if from a firm
other than a commercial bank, S&L, or banking agency. Outside
successions combine industry and non-industry successions. The
t-statistics test the difference in mean abnormal returns between
the two types or classes of successions reported in each panel.
Wilcoxon rank-sum Z scores not reported in the tables that test
the difference in medians between various sub-samples are
consistent with the t-tests.

 Description of succession N Mean T-stat
 Abnormal
 Returns

Panel A: Type of succession
 Forced succession 41 3.121 2.087 (b)
 Natural succession 87 0.721

Panel B: Origin of successor
 Inside succession 75 0.666 -2.001 (b)
 Outside succession 53 2.655

Panel C: Natural and regulatory successions
 Natural succession 87 0.721 1.779 (c)
 Regulatory succession 16 4.489

Panel D: Outside successions
 Industry succession 40 2.474 -0.346
 Non-industry succession 13 3.213

Panel E: Inside and non-industry successions
 Inside succession 75 0.666 -1.322
 Non-industry succession 13 3.213

Panel F: Inside and industry successions
 Inside succession 75 0.666 1.621
 Industry succession 40 2.474

Panel G: Forced successions
 Non-regulatory succession 25 2.246 -0.946
 Regulatory succession 16 4.489

Table 6: Regressions

The two-day abnormal returns associated with the announcement
of an executive succession at a sample of U.S. banks that are
listed by both CRSP and COMPUSTAT, and that are also recorded
in the American Bank Directory from the Fall of 1983 to Fall
1993 is regressed on the variables hypothesized to influence
the impact of executive successions. These successions have
been classified as natural or forced. Each succession is also
identified by the origin of the successor when there is only
a single successor or if all the successors for a given succession
can be classified as being of the same origin. Whenever there is
more than one successor for each succession and the successors
are of a different origin, no classification is made as to
origin. The classification of successions by origin include
inside succession, if the executive is promoted from within
the firm, a subsidiary, or a merged firm; industry succession,
if the executive is from another bank, S&L, or banking agency,
and non-industry succession, if from a firm other than a
commercial bank, S&L, or banking agency. The t-statistics (in
parentheses) test the significance of the estimated coefficients
for the various explanatory variables in explaining the abnormal
stock returns associated with executive successions.

 Variables Model 1 Model 2 Model 3

Intercept 0.0312 (a) 0.027 (a) 0.037 (a)
 (3.955) (3.803) (4.273)

Type of succession -0.024 (b) -0.020 (b)
 (-2.508) (-1.996)

Origin of successor -0.020 (b) -0.015
 (-2.181) (-1.579)

Number of observations 127 127 127
F 6.288 4.757 4.427
Adjusted [R.sup.2] 0.048 0.036 0.066

(a) Represent significance at the 1% level,

(b) represent significance at the 5% level,

(c) represent significance at the 10% level.