Abstract

We examine the relationship between protracted CEO successions and stock returns. In protracted successions, an incumbent CEO announces his or her resignation without a known successor, so the incumbent CEO becomes a “lame duck.” We find that 31% of CEO successions from 2005 to 2014 in the S&P 1500 are protracted, during which the incumbent CEO is a lame duck for an average period of about 6 months. During the reign of lame-duck CEOs, firms generate an annual four-factor alpha of 11% and exhibit significant positive earnings surprises. We show our results are driven by the positive tournament incentives among CEO candidates in firms that end up appointing an internal successor.