CEO succession origin and annual reports readability

Abstract

We examine the association between the origin of chief executive officer (CEO) succession (i.e., promoting a CEO from within the firm as opposed to recruiting from outside) and annual reports readability. Based on a sample of large U.S. companies during the period 2004–2020, we predict and find that companies with insider CEOs issue more readable 10-K reports compared to those who hire from outside. This positive association between insider CEOs and readability is less pronounced for insider CEOs who wield greater power. We further document that the association is stronger if CEOs have a financial background. To further explore the underlying mechanism, we test whether the association is driven by earnings management or firms’ business strategies. Our results show that the effect of CEO succession origin on readability is primarily attributable to business strategies. We address endogeneity issues and check the robustness of our results in several ways. Finally, we document important policy implications emerging from our study.