External CEOs better suited for struggling businesses than internal ones

Washington: A new study has revealed that externally chosen CEOs can rejuvenate struggling businesses.

University of Missouri study found that CEOs hired from outside a company tend to spend more money on research and development, while CEOs hired from within are likely to make large, strategic acquisitions.

As per the six-decade study, while 78 percent of new CEOs are selected from within the organization, internally and externally chosen CEOs execute different financial strategies that could be best-suited for companies with different needs.

Researcher Stephen Ferris said that if a company currently is either mired in mediocrity or performing poorly and it announces the hiring of an external CEO, it could be a signal that the board is serious about fixing problems.

Ferris added that although they cannot foretell the outcome of hiring an external CEO, or any new CEO, it could give investors reason to think about investing a little more confidently in that company within the context of their portfolios. The hiring of an internal candidate, on the other hand, may indicate that a company is stable and likely to continue an already successful business approach.

Researchers analyzed business decisions of new CEOs and found that external hires spend more money on research and development, which Ferris said is indicative of commitment to innovation. The study also showed that while internal hires make fewer merger offers than their external counterparts, the acquisitions they do make are much larger in size and more frequently purchased using stock rather than cash.

Ferris noted that the move to select an external CEO often speaks to the strength of character and foresight of these firms and of American capitalism in general, given that one out of every five new CEO positions goes to an external candidate.

Ferris said that because external and internal CEOs make different strategic and financial decisions and tend to be hired under different circumstances, both internal and external hires can be positive moves depending on companies' needs.

The study will be published the Journal of Accounting and Finance.