Hiring retirement‐age CEOs

• Published date: 01 September 2021
• Author: Ye Wang,Sirui Yin
• Date: 01 September 2021
• DOI: http://doi.org/10.1111/eufm.12284

Eur Financ Manag. 2021;27:641–665. wileyonlinelibrary.com/journal/eufm © 2020 John Wiley & Sons Ltd.

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DOI: 10.1111/eufm.12284

ORIGINAL ARTICLE

Hiring retirement‐age CEOs

Ye Wang

1

|Sirui Yin

2

1

School of Business, Stevens Institute of

Technology, Hoboken, New Jersey

2

Farmer School of Business, Miami

University, Oxford, Ohio

Correspondence

Sirui Yin, Farmer School of Business,

Miami University, 83 N Patterson Ave.,

Oxford, OH 45056, USA.

Email: davidyin@miamioh.edu

Abstract

More than 10% of the S&P 1500 companies have

hired a CEO who starts the job near or above the

conventional retirement age of 65 years old. This

phenomenon exists among all industries and persists

over time. Firms are more likely to hire retiring CEOs

when the CEO job risk is high and when the firm is in

distress. Retiring CEOs receive lower total compensation,

the compensation structure puts a higher weight on

nonequity‐based compensation, and have a shorter

tenure. Retiring CEOs can be beneficial to shareholders

when they are hired for the right purpose.

KEYWORDS

CEO, distress, retirement age

JEL CLASSIFICATION

G30; G32; J24; J26

EUROPEAN

FINANCIAL MANAGEMENT

The authors are sincerely grateful to the Editor, Prof. John A. Doukas, and an anonymous referee for constructive and

insightful comments and suggestions that have significantly improved the paper.

“Brian Duperreault is expected to bring stability to the insurer as it works on a

turnaround and battles activist investor Carl Icahn.”

–Ciara Linnane on AIG's new 70‐year‐old CEO Brian Duperreault

“I know how to run a railroad. I wrote the playbook.”

–CSX's new 72‐year‐old CEO Hunter Harrison

“He was able to draw on years of experience in the airline business as well as sharp

political skills honed during time spent working on Capitol Hill.”

–Del Quentin Wilber on Delta's new 71‐year‐old CEO Gerald Grinstein

1|INTRODUCTION

Academic theories have long suggested that agency problems worsen as CEOs approach re-

tirement (e.g., Gibbons & Murphy, 1992; Holmstrom, 1982). These CEOs have fewer career

concerns and focus on short‐term objectives at the expense of long‐term shareholders. The

empirical evidence largely agrees with theory predictions: compared to otherwise similar

younger CEOs, older CEOs take less risky projects, cut R&D and acquisition spending, and

reduce leverage (Dechow & Sloan, 1991; Serfling, 2014; Yim, 2013). Firms see a sharp increase

in the likelihood of receiving a takeover bid when the target CEOs reach retirement age

(Jenter & Lewellen, 2015). As a result, three‐quarters of the S&P 500 firms and half of the S&P

1500 firms have adopted policies that require CEOs to retire at a certain age.

1

Over the past two decades, 10.05% of the S&P 1500 companies have appointed new CEOs

who were near or have passed the conventional retirement age of 65. Some of the prominent

companies include Delta, AIG, CSX, and Yum Brands. Hiring retiring CEOs often leads to

mixed reactions among the board of directors, corporate executives, financial analysts, and

shareholders. For example, the board of CSX was divided when activist investors pushed to hire

73‐year‐old Hunter Harrison as the new CEO to lead the turnaround. The Chief Operating

Officer and two senior managers resigned but the stock price went up 60% in the 6 months after

Hunter Harrison's takeover.

2

The empirical evidence, therefore, leaves us to wonder if retiring

CEOs can improve firm performance and increase shareholder wealth in certain situations.

Compared to their younger peers, retiring CEOs have accumulated a wealth of industry

experience and professional connections, which are valuable to the firm.

To investigate the potential reasons for hiring a retiring CEO, we propose two hypotheses. The

first one posits that firms strategically hire retiring CEOs to benefit from their valuable business

experience and social connections. Hiring these retiring CEOs also involves less uncertainty be-

cause they have an established track record. Hence, our first hypothesis predicts that firms bring in

retiring CEOs strategically and these CEOs are value‐adding to the firms. Alternatively, if age‐

related physiological changes negatively impact the decision‐making and judgment‐related per-

formance of these retiring CEOs, our alternative hypothesis predicts that firms only hire retiring

CEOs when the board is not prepared for CEO succession. If so, hiring retiring CEOs should be

associated with negative stock market reactions and poor post‐appointment performance.

1

https://www.marketwatch.com/story/aigs-new-ceo-is-70-why-older-ceos-are-the-exception-2017-05-16.

2

See Ziobro, Benoit, and Lublin (2017).

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WANG AND YIN