CEO succession and firms’ internationalization processes: Insights from German companies

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CEO succession and firms’ internationalization processes: Insights from German companies ⁎

Corinna Elosgea, , Michael-Joerg Oesterlea, Christina M. Steina, Stefan Hattulab a b

University of Stuttgart, Institute of Business Administration, Department of International and Strategic Management, Keplerstrasse 17, 70174 Stuttgart, Germany University of Stuttgart, Institute of Business Administration, Marketing Department, Keplerstrasse 17, 70174 Stuttgart, Germany

A R T I C L E I N F O

A B S T R A C T

Keywords: CEO succession Internationalization processes Internationalization rhythm Number of CEO changes Succession type Longitudinal research design Germany

This article analyses the relationship between CEO succession events and German firms’ internationalization processes, which is represented by the degree of internationalization (DOI) growth and internationalization rhythm. Based on a theoretical framework combining elements of agency theory, institutionalism and upper echelons approach, we propose a longitudinal model to examine the relationships of both process variables with the number of CEO changes and succession type (internal vs. external succession), respectively. The results of our study of 102 German firms over 23 years (1990–2012) show an inverted U-shaped impact (no impact) of the number of CEO changes (succession type) on the DOI growth and a positive (negative) monotonic effect on the rhythm of internationalization.

1. Introduction Scholars in international business have recently emphasized the role of individual decision-makers and particularly CEOs in the internationalization of firms (e.g., Herrmann & Datta, 2006; Laufs, Bembom, & Schwens, 2016). In this vein, mostly the relationships between the characteristics of a top management team or the CEO (e.g., education (Deeks, 1972), experience (Bigley & Wiersema, 2002; Herrmann & Datta, 2006; Laufs, Bembom, & Schwens, 2016)) and single internationalization aspects such as market entry modes (Herrmann & Datta, 2002; Nielsen & Nielsen, 2011) or export success (Dichtl, Koeglmayer, & Mueller, 1990) have been investigated, suggesting a static and one-dimensional perspective. A more dynamic view which applies knowledge about the influence of the CEO to internationalization processes is still underdeveloped. Both dimensions have – with few exceptions (e.g., Lin & Liu, 2011, whose study only deals with Taiwanese firms and uses post-succession TMT changes as intermediary between CEO succession and DOI change or Oesterle, Elosge, & Elosge (2016) whose study focuses on CEO narcissism but neglects CEO succession) – hardly been merged yet. As empirical analyses in the field of general and strategic management impressively show, the influence of the human factor, i.e., the CEO, on a firm’s actions and course can be identified by studying CEO succession effects (Virany, Tushman, & Romanelli, 1992). In this context, the upper echelons approach plays a prominent role in explaining the effects of CEO succession: Respective studies are based on the

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assumption that individuals and, therefore, also CEOs, differ, especially in terms of their cognitive map; accordingly, those differences should affect their decision-making. A CEO change therefore could mean that the new top manager will do things differently than his/her predecessor, leading to changes in the firm’s internationalization actions. Moreover, the assumptions of agency theory and institutionalism apply to the dynamic view on how CEO successions impact the internationalization process of firms. In this research, we therefore run an eclectic approach by combining the different theoretical elements in order to develop hypotheses dealing with succession effects on the internationalization process of a firm. Regarding the internationalization process, we are especially interested in the following two formal dimensions: 1) the degree of internationalization (DOI) growth over time, and 2) the rhythm of internationalization over time. The DOI growth is important to consider in order to gain a general understanding of a firm’s internationalization process. Moreover, the concept of rhythm has been shown to facilitate a deeper understanding of the nature of the internationalization process and researchers assume that the rhythm of internationalization directly influences a firm’s performance (Vermeulen & Barkema, 2002). Focusing on CEO succession effects holds several key contributions towards a better understanding of internationalization processes with respect to the influence of strategic decision-makers. First, this research reveals an interplay of the assumptions of upper echelon approach, agency theory, and institutionalism in the international business context. Therefore, the knowledge on the individual decision-maker and

Corresponding author. E-mail address: [email protected] (C. Elosge).

http://dx.doi.org/10.1016/j.ibusrev.2017.09.004 Received 7 December 2016; Received in revised form 31 July 2017; Accepted 5 September 2017 0969-5931/ © 2017 Elsevier Ltd. All rights reserved.

Please cite this article as: Elosge, C., International Business Review (2017), http://dx.doi.org/10.1016/j.ibusrev.2017.09.004

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2.2. Agency theory as reference point

his/her influence on the internationalization process is theoretically consolidated and extended, since we believe that taking an eclectic approach with regard to the influence of an individual decision-maker’s influence on internationalization processes will be necessary to further elaborate and analyze the mechanisms of this relationship. Second, this research takes a deeper look into the formal elements and modes of internationalization processes which is a prerequisite to understanding the nature and phenomenon of the process itself. Finally, researchers and practitioners alike can gain further insights into the causes of internationalization decisions. This seems important given that internationalization processes affect almost all firms and, due to their link to a company’s profit, should be elaborated in further detail. Our contributions can be summed up as follows: Existing theories which deal with strategic decision-makers (agency theory, institutionalism and upper echelons theory) are extended to an international context and functional relationships in internationalization process research which have remained unexplored, i.e., the impact of individual decision-makers, are studied.

The strategic relevance of individual decision-makers has been widely discussed in agency theory (Jensen & Meckling, 1976). The theory is based on the assumption of the separation of ownership and control in organizations (Berle & Means, 1932) and addresses the role of risk in a prominent fashion (Barney & Hesterly, 1996; Beatty & Zajac, 1994). Agents (managers/CEOs) are assumed to be risk averse, while principals (owners) appear to have a neutral attitude towards risk (Eisenhardt, 1989). This is due to the owners’ opportunity to diversify a large part of their risk over the capital market by investing in various companies. Furthermore, the self-interest assumption (Fama, 1980) is regularly brought up to explain why companies pursue strategies which do not necessarily match owners’ preferences (Amihud & Lev, 1981; Trautwein, 1990). Especially in the case of high managerial discretion due to dispersed ownership structures (Amihud & Lev, 1999; Crossan, 2011; Crossland & Hambrick, 2011; Salancik & Pfeffer, 1980; Tuschke & Sanders, 2003), managers possess the power to trace personal goals during their employment. Empire-building theory deals with a certain aspect in this context: managers tend to favor diversifying strategies to capture private benefits (Aggarwal & Samwick, 2003; Jensen, 1986) by transferring firm resources to their personal gain (Harris & Raviv, 1991). The resulting opportunities to consume specific perquisites as well as a high degree of power and prestige by controlling a large company represent desirable goals for managers. As a consequence, it might be conceivable that managers – and in this context especially CEOs as the most powerful decision-makers of a firm – pursue strategic decisions that enlarge their personal benefits. These, however, do not necessarily need to be in conflict with the shareholders’ interests. Two important reasons lead us to rely on agency theory as a theoretical basis from which to derive our research question: (1) the theory represents a very prominent, often employed and well-evidenced approach to model the behavior and actions of managers and therefore CEOs; (2) there are a lot of opportunities for managers, e.g. CEOs, to pursue strategic decisions and to maximize personal goals due to the separation of ownership and control.

2. Theory and hypotheses 2.1. Individual decision-makers in internationalization process theory Internationalization processes are a classical field of international business research. However, despite of being one of the most important factors influencing the firm’s strategy, the individual decision-maker has been relatively unexplored in internationalization process theory so far. Especially the traditional models of the Nordic School (Johanson & Vahlne, 1977, 1990; Johanson & Wiedersheim-Paul, 1975; Luostarinen, 1979) do not explicitly deal with the individual decisionmaker as a key player in the internationalization process (Aharoni, Tihanyi, & Connelly, 2011). More recent approaches, such as the GAINS paradigm (Gestalt-oriented Approach of International Business Strategies) (Macharzina & Engelhard, 1991), which is based on the gestalt approach (Miller & Friesen, 1978, 1984), or the three-E-concept (Kutschker, Bäurle, & Schmid, 1997), acknowledge the driving role of CEOs for internationalization. However, they do not make it possible to gain information on the CEO-related mechanisms that shape internationalization processes. It is therefore not surprising that there are almost no empirical studies analyzing the influence of CEOs and CEO succession events specifically on a firm’s international development. The resulting lack of knowledge is somewhat surprising as within management and strategy research the influence of CEOs on organizational change is an integral part of to the traditional research objectives. Especially CEO successions are viewed as “critical decision or event” (Miller & Friesen, 1980: 596). Consequently, such CEO changes and respective studies might allow further insights into the functional mechanisms of the relationship between individual decision-makers and internationalization processes in the field of international business. But, most of the studies (in general management) only take single CEO changes into account and neglect a long-term perspective which would be especially important for understanding the development of the firm. To address our research question – i.e., what is the influence of CEO succession and succession type on a firm’s internationalization process – we need to take an eclectic approach and rely on elements provided by agency theory and new institutionalism to explain the general effect of CEO succession on the DOI growth and an upper echelons perspective (Hambrick & Mason, 1984) – in addition to its already demonstrated function as a general argument towards the relevance of CEO succession events for the further development of the firm – to explain individual effects of CEO succession on the rhythm of the internationalization. The general framework of our paper is shown in Fig. 1.

2.3. Institutionalism as reference point Within the approach of institutionalism, a major driver for firms’ development and success is legitimacy (which can be defined as ‘organizations embrac[ing] specific institutional forms or practices because the latter are widely valued within a broader cultural environment.’ (Hall & Tayler, 1996, p. 949). We take this basic assumption and transfer it to the individual level: new CEOs strive for the legitimacy of their activities. In doing so, they will be motivated and devote a significant amount of attention and energy to respond to their (new) mandate (Hambrick & Fukutomi, 1991). As one way of doing so might be the enlargement of international activities we believe that the perspective taken by institutionalism will help us to understand how CEOs and respective succession events may influence the internationalization process of firms. 2.4. Upper echelons theory as reference point Hambrick and Mason’s upper echelons theory (1984) tries to clarify the role of decision-makers as drivers of a company’s strategy. Following this approach, organizational outcomes are a reflection of the strategic choices of managers. Because of the complexity of situations and the individual cognitive base and values managers have, their perception is limited to selective environmental and organizational stimuli. This results in an individual interpretation of situations and provides the basis for a specific strategic choice (Cyert & March, 1963). In order to predict and measure the managers’ cognitive map, background characteristics are used. Hambrick and Mason (1984) argue that 2

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Fig. 1. General research framework.

characteristics such as age, tenure, and financial position are indicators of the possible behavior shown in a specific situation. Whereas the authors consider the whole TMT, the role of the CEO is especially important and has been part of past research on strategic decisions. Within this literature stream, the CEO has been recognized as the principal leader and architect of the firm (Hutzschenreuter, Kleindienst, & Greger, 2012; Virany, Tushman, & Romanelli, 1985). The theory deals with behavioral decision-making and therefore explicitly values the influence of strategic decision-makers on a firm’s strategy. This is why we assume that the consideration of the approach is indispensable when focusing on the role of CEOs in internationalization processes. Fig. 2 shows how the three theories will be applied in our research model.

options, tie the CEO’s employment income to the performance of the firm, the individual employment risk is also tied to the firm’s risk (Amihud & Lev, 1981). If firm-specific goals are not achieved, CEOs may lose their employment and thus a major part of their income. As there is no comparable counterpart to the stock market for CEOs’ human capital, where stock risks can be dispersed, risk-averse CEOs seek for other possibilities to diversify their individual risk. Closely related to the arguments used to demonstrate that managers can diversify or lower their employment risk by diversification (via conglomerate mergers) (Amihud & Lev, 1981), we assume that internationalization goes along with the same consequences for managerial risk (Oesterle, Richta, & Fisch, 2013). Moreover, internationalization makes it not only possible for CEOs to stabilize their income by lowering the firms’ risk; they can also increase their income. This is because multinationality often positively influences the firms’ value (Contractor, Kundu, & Hsu, 2003; Tang & Tikoo, 1999) which is a major element of pay-for-performance systems (Jensen & Murphy, 1990). An additional driver for internationalization may be the CEOs’ pursuit of status and prestige. This view on internationalization is in line with the well-known argument of ‘empire building’ (Hope & Thomas, 2008). Considering an institutionalism-based position, it can be shown that shareholders, employees, customers and the labor market for CEOs reward internationalization for different reasons. As shareholders view internationalization as a profit and value-driving activity (Tongli, Ping, & Chiu, 2005), CEOs face a great pressure to measure up to respective expectations. In addition to shareholders, employees and customers also assume or expect from new CEOs to cause changes in a firms’ strategic direction. Once again, internationalization seems to be an adequate tool to demonstrate such kinds of activities (Moy & Lee, 2002; Steenkamp, Batra, & Alden, 2003). Finally, the labor market for managers appreciates experienced managers; by internationalizing their firms, CEOs can demonstrate their skills and capacities, making

2.5. The effect of the number of CEO changes on internationalization processes According to agency theory, a CEO’s behavior can be described by utility maximizing and – as a major part of this – risk aversion. Internationalization may be a tool for CEOs to realize those individual motives. This is assumed, firstly, because internationalization goes along with a greater leeway for CEOs. As it is more difficult to monitor firms that are running internationally dispersed activities than those that are doing business only on their home market, CEOs try to enlarge their control-related degree of freedom by further internationalization (Singh & Nejadmalayeri, 2004). Furthermore, CEOs show a strong interest in reducing the firms risk since their income and wealth is closely related to the firm’s well-being. CEOs lend a major part of their human capital to their firm (Fama, 1980) and the income from this loan represents the largest part of their total income (Amihud & Lev, 1981). As the established compensation systems, consisting of profit-sharing schemes, bonuses and stock

Fig. 2. Research model.

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them more attractive for other firms (Daily, Certo & Dalton, 2000). In general, CEOs may be willing to promote rapid actions and a change in the firm’s internationalization strategy to justify their appointment, demonstrate their abilities and gain trust (Lin & Liu, 2012; Shen & Cannella, 2002). In sum, due to considerations like the maximization of personal goals or the pursuit of legitimacy, we assume that CEO changes are reflected in a growing international activity, which leads to the conclusion that CEO succession events result in an increase of the DOI growth. However, too many CEO changes over time can lead to turbulence in the firm and will give rise to negative, dysfunctional consequences. This is because the cost of adaption after each CEO succession event will exceed the benefits of breaking organizational inertia (Shen & Cannella, 2002). If we rely on information cost theory and the concept of absorptive capacity, the company is not able to handle so much new information properly (Cohen & Levinthal, 1990). The larger part of the firm remains the same while CEO changes are more often. As we pointed out before, every CEO has his/her own cognitive map and will pursue the targeted international goals. With every new CEO, the stable part of the firm has to learn new things, e.g., about foreign markets or intercultural negotiations. The more often CEO changes occur, the more likely will be some kind of ‘information overload’ for the rest of the firm until the staff is able to handle all the required information. Additionally, foreign market activities cannot be endlessly enlarged, resulting in a slowdown of DOI growth. We therefore assume that a positive linear function is only valid up to a certain number of succession events when the intention of every new CEO meets reality. After reaching a peak level, the effect of the number of CEO changes will become negative. Therefore, we predict that:

is the successor type, which can also be explained by means of an upper echelons perspective. The former CEO can be succeeded either by somebody from within the firm or by hiring someone external (Agrawala, Knoeber, & Tsoulouhas, 2006). Boards usually have to decide between executives who are expected to implement a firm’s existing policies and others who are expected to implement new policies (Parrino, 1997). Prior experience in working in another firm can influence the cognitive map of CEOs, meaning that CEOs who have worked in the firm before are more likely to share the firm’s current values and cognitive perspectives. The alignment or non-alignment with the firm’s values is important because it influences how the new CEO views the firm’s current strategy and affects the CEO’s decisions (Lin & Liu, 2012). As inside successors have been exposed to the values of the firm for a certain period of time, they show familiarity with the processes and culture of the firm (Wiersema, 1992) and are probably in agreement with the overall strategy of the firm. Their socialization process within the firm leads to a commitment to the status quo and it is therefore likely that internal successors will continue the strategic path of the firm (Hambrick, Geletkanycz, & Fredrickson, 1993; Shen & Cannella, 2002). It can be expected that internal successors will go along with a tendency towards stability and continuity in a firm’s development (Friedman & Singh, 1989). Contrary to the consequences of internal succession, external succession increases disruption in the firm and changes its strategic direction (Helfat & Bailey, 2005; Parrino, 1997). From an institutionalism perspective, one could argue that, in contrast to internal successors, external CEOs face a greater pressure to measure up to shareholders’ expectations. This is because external successors are commonly hired to bring about change in the existing situation, break with traditional patterns and overcome organizational inertia and resistance to change or to replace a poorly performing CEO (Friedman & Singh, 1989; Shen & Cannella, 2002). CEOs recruited externally can also differ from internal CEOs in terms of the capabilities they bring to the firm: for example, externally recruited CEOs might have acquired different leadership styles, knowledge, skills or overall problem-solving capabilities based on previous experience which might be very different from the understanding of the current management and internal successors (Helfat & Bailey, 2005; Parrino, 1997). Besides these capabilities, the incoming CEO might possess external resources (e.g., new channels and new clients in the international market or international social networks) to help the firm implement international activities that were previously limited by either a lack of resources or inertia (Lin & Liu, 2012). For these reasons, the attractiveness of outsiders is likely to be greater when a change in strategy is pursued rather than the retention of the status quo (Parrino, 1997). We assume that these reasons are especially important in the context of internationalization as respective strategies differ from firm to firm, leading to different socialization contexts and, therefore, different possibilities of international experience (Jaw & Lin, 2009). Accordingly, we conclude that internal succession leads to a lesser change in the DOI growth than external succession. Furthermore, internal succession decreases the irregularity of the internationalization process rhythm of a firm more than external succession. Therefore, we predict that:

H1 (a). There is an inverted-U-shaped relationship between the number of CEO succession events and change of the DOI growth over time. CEO changes in large corporations always have symbolic character as they are widely noticed by all stakeholders and the public (Kesner & Sebora, 1994; Liu, Valenti, & Yu, 2012). Furthermore, it is evident that CEO succession also has far-reaching importance inside a company as these events lead to turbulence and increase disruption in a firm (Grusky, 1960; Helmich & Brown, 1972; Schwartz & Menon, 1985), which is often seen as a potential source of danger to a company’s success. However, as firms can suffer from organizational inertia, CEO changes also display a possibility of causing a new fit between internal factors and varying external, environmental requirements which is in line with the assumptions of the Gestalt approach. In general, new CEOs are seen as change agents (Miller & Friesen, 1978; Miller, 1993) and are expected to change the direction of the firm’s development by implementing new policies (Helfat & Bailey, 2005; Miller & Friesen, 1980; Romanelli & Tushman,1994). Breaking organizational inertia by means of a CEO change therefore also affects the internationalization process rhythm: As stated in the upper echelons approach (Hambrick & Mason, 1984), successors differ in terms of their cognitive map, which influences the CEOs’ activities. That means the new CEO emphasizes other facets of internationalization after each succession event due to aspects such as personal views on the business and individual goals. Accordingly, CEO succession events lead to a change in the former path of internationalization (Helfat & Bailey, 2005). As every CEO creates his/ her ‘rhythm’, an individual “pattern in a stream of decisions” (Mintzberg, 1978: 935), a high number of succession events leads to an irregular rhythm of the firm’s internationalization. We therefore hypothesize:

H2 (a). Internal succession leads to a lower DOI growth than external succession. H2 (b). Internal succession decreases the irregularity of the internationalization rhythm compared to external succession.

H1 (b). The higher the number of CEO changes, the more irregular the internationalization rhythm is.

2.7. The moderating effect of ownership concentration and internationalization processes

2.6. Successor type (internal/external) and internationalization processes

In order to see whether a CEO really influences a company’s outcome, the CEO’s leeway in decision-making has to be determined. The parameters of discretion granted to CEOs can traditionally be traced

One of the differences studied most in terms of succession research 4

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be even more interesting to investigate our research question in an institutional context like Germany. This is in line with other studies researching CEO changes (e.g., Oehmichen, Schult, & Wolff, 2017). We chose this 23-year-length of the panel to include a large amount of CEO changes in the firms. Panel data in general contains observations obtained over multiple time periods for the same firms. This enables us to receive more information in comparison to cross-sectional data and among other factors, to control for individual heterogeneity (Baltagi, 2005). Due to the panel structure of our sample and especially due to its relatively long time frame, not every company which was part of the sample in 1990 remained in the sample until 2012. This so-called panel mortality/attrition is due to facts like the acquisition of other companies, the closing down of companies, etc. Due to these reasons, 52 companies were still part of the sample in 2012 (see “Measures” section for how we accounted for mortality issues). We then identified all the CEOs in our sample through which the final sample contained a total of 1794 firm-year observations and 234 CEO succession events. In our sample data was collected on an annual basis. We manually obtained data from the firms from their financial statements, annual reports and from the Hoppenstedt Stock Guide (Hoppenstedt Aktienführer: a periodical collection of financial data on listed firms in Germany). Furthermore, information about CEOs’ biographies was added from Who’s Who European Business Manager (a database that publishes firm information and personal biographies of managers). Plausibility checks for all variables were also conducted.

back to different ownership structures (Jensen & Meckling, 1976). Within this stream of research, ownership concentration (usually referring to the percentage of shares owned by the major shareholder(s)) is often seen as a mechanism to control executives and therefore a measure of manager’s control effectiveness (Fadhila, Ali, & Anis, 2014). Controlling a manager’s action regarding internationalization might be necessary as CEOs and owners might pursue different internationalization goals. In this context, it seems possible that CEOs would like to push the DOI and “overdiversify” the company, as they see benefits in leading a large, internationally known company and as compensation and company size usually correlate positively. The owners, however, might see an unnecessary increase in risk for their investment and therefore not support an endless increase in internationalization. According to Hambrick and Finkelstein (1987) the effect of a CEO (and his personal characteristics) depends on the managerial latitude he/she has. One can come to the conclusion that, in a scenario in which managers have no discretion, a firm’s outcome will be insensitive to a CEO’s influence (Fadhila, Ali, & Anis, 2014). However, if the ownership of a firm is less concentrated – e.g., the firm has many small investors who only possess small numbers of firm shares instead of having one or only a few controlling shareholder(s) – the CEO has greater leeway in decision-making. This is because individual owners have less bargaining power and therefore less ability on incentives to enforce actions in favor of their own interests. This means that managers have more degrees of freedom in firms with dispersed ownership in contrast to firms with a higher degree of ownership concentration (Oesterle et al., 2013; Tuschke & Sanders, 2003). The greater the level of discretion, the greater the potential impact of a CEO on a firm and, hence, the greater the likelihood that there will be a strategic change in international orientation (Finkelstein & Boyd, 1998). Accordingly, ownership concentration can be expected to influence CEOs’ discretion and therefore moderates the relationship between succession and change in internationalization strategy. Therefore, we hypothesize:

3.2. Measures 3.2.1. Dependent variables In order to capture the influence of the CEO on the overall internationalization behavior of the firm, we established two kinds of measures for the internationalization: the DOI growth and the internationalization process rhythm, both regarded over time. 3.2.1.1. Degree of internationalization growth. There is no widely accepted measure for a firm’s DOI (Contractor et al., 2003; Sullivan, 1994). To operationalize the firm’s DOI growth, we focused on the ratio of FSTS and its change which is still – despite all criticism and disadvantages (e.g., Sullivan, 1994; Tallmann & Li, 1996) – the most commonly used measure for internationalization (Annavarjula & Beldona, 2000; Thomas & Eden, 2004).

H3 (a). A low degree of ownership concentration positively moderates the relationship between the number of CEO changes and DOI growth (H1 (a)). H3 (b). A low degree of ownership concentration positively moderates the relationship between the number of CEO changes and the internationalization rhythm (H1 (b)).

3.2.1.2. Internationalization process rhythm. Cross-sectional measurements fail to reflect the internationalization process with its specific time-related nature. Even measuring internationalization variables at two points in time (e.g., t0 and t 15 in Fig. 3) might lead to misinterpretations as a certain DOI can be achieved either by rapid growth in one period followed by periods of inactivity or continuous expansion in every period (Lin, 2012). In a more general context, this phenomenon was also part of Miller & Friesen’s thoughts whose concept states two phases of an organizational development: a static phase or phase of evolutionary development (momentum) and a phase of revolutionary or radical change. Depending on the combination of these two phases, i.e., on how long each phase lasts, we will see a (totally) different rhythm of change (Miller & Friesen, 1982). A repetitive sequence of momentum phases, revolutionary phases or a “constant mixture” of both can be associated with a rather regular rhythm. In contrast, a random composition of momentum and revolution can be a sign of a more irregular rhythm. In the context of international business, this has also been shown by Welch and Luostarinen (1988), who stated that an increasing internationalization is not equal to a regular mode of development. In our concept, the dependent variable internationalization process rhythm stands for the degree of regularity of the internationalization process and is supposed to measure how regular or irregular an

3. Sample and measures 3.1. Sample We test the theory empirically using panel data from the 102 largest German manufacturing firms in 1990 for 23 years between 1990 and 2012. We only included manufacturing companies to ensure comparability between the firms’ characteristics. The firms were listed in the WELT 500 list of the largest German companies in the year 1990. After considering data availability, sales dimension and character of firms (manufacturing vs. non-manufacturing), 102 out of the 500 firms remained. Germany has a very interesting institutional context to study as the corporate governance system differs greatly from that in many other countries, e.g., US firms (which have been widely researched already): In publicly traded firms, the supervisory board and management board are strictly separated. In firms of a certain size, the board seats represent 50 percent ownership interests and 50 percent worker interests. The absence of the CEO in the supervisory board might mean that the influence of CEOs in German firms is even smaller than the one of CEOs in US firms. Furthermore, the two-tier setting, with its strict separation of management and board, might make it easier to isolate the decisionmaking aspect and accredit it to the CEO. These advantages determined our selection of a German sample for the study as we believe that it will 5

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Fig. 3. Regular and irregular patterns of rhythm (Vermeulen & Barkema, 2002: 642; modified).

leeway of decision-making. We used the stake of the largest shareholder in order to operationalize the variable (Liu, Valenti, & Yu, 2012; Oesterle, Richta, & Fisch, 2013; Pedersen & Thomsen, 1999).

internationalization process is. Influenced by Vermeulen and Barkema (2002), we measure the firm’s rhythm of the internationalization process by the kurtosis of the change of DOI. This measurement considers the distribution and concentration of DOI change over time. A high kurtosis symbolizes large peaks in DOI change combined with stages of inactivity whereas a low kurtosis symbolizes a constant change of DOI. Therefore, a high kurtosis stands for an irregular rhythm while a lower kurtosis is associated with a more regular development of the internationalization process.

3.2.4. Control variables A number of control variables are included in the study. The inclusion of these control variables is necessary in order to clarify the relationship between the dependent and independent variables. We control for firm size as well as for firm profit. Firm size is measured as the logarithm of the total sales of the company. A large firm size is typically related to extensive international activities as larger companies are more likely engaged in international activities due to the vast amount of resources they can provide to deal with complex foreign information, the possibility to benefit from economies of scale (Barkema & Shvyrkov, 2007; Bausch and Krist, 2007; Hannah, 1996) and a broader international experience (Calof, 1994; Johanson & Vahlne, 2009). Following the same logic as with the size variable, we assume that profitable companies have available resources that enable the company to internationalize its activities. We therefore control for firm profit (ROA) by including the return of assets rate (Hutzschenreuter & Horstkotte, 2013; Iaquinto & Fredrickson, 1997) as well as firm assets as a control variable (Haunschild, 1993). In order to consider classical control variables from succession research we also included CEO age and tenure as controls. Age and tenure influence the decision behavior of the decision-maker and also have an impact on a CEO’s career horizon. We include year dummies which effectively control for all time-specific factors. Furthermore, we control for panel attrition (mortality) with a binary dummy variable of whether the firm has

3.2.2. Independent variables We measure the number of CEO changes by the number of succession events the company experienced since the beginning of our observation. The companies which were still part of the sample in 2012 experienced 2.9 CEO succession events on average during the observation time of 23 years. Succession type has been operationalized through a binary variable equaling insiders 1 and outsiders 0. We classify succeeding CEOs as insiders if they had been employed in the firm before the succession event occurs. CEOs who have not worked for the firm before are classified as outsiders (Parrino, 1997). Every one of the companies in the sample had at least one CEO change, with six CEO changes being the highest number. Two-thirds of the CEOs in office in the year 2012 were internal successors and the average ownership concentration was 45%, although it had a wide variation range from 4% to 100%. 3.2.3. Moderator variable Ownership concentration is included as it decisively impacts a CEO’s 6

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Table 1 Operationalization of study variables. Variable

Symbol

Operationalization

Degree of internationalization (DOI) growth Internationalization process rhythm Number of CEO changes Succession type Ownership concentration Firm size Firm profit Firm assets CEO age Tenure Panel attrition (mortality) Year

DOIit IPRhyit CEOSucit SucTypit OwnConit FSizeit ROAit Assetsit Ageit Tenureit Mortalit Yeart

Ratio of FSTS and its change Kurtosis of the change of DOI Number of succession events the company experienced since the beginning of observation period Dummy variable: insiders = 1 and outsiders = 0 Stake of the largest shareholder Logarithm of the total sales of the company Return of assets rate Amount of assets Age of CEO in number of years Tenure of CEO in respective position in firm in number of years Dummy variable: existed at end of observation period = 1 and otherwise = 0 Dummy variable: Respective year = 1 and otherwise = 0

we do not need to control for a time trend variable because this is a linear combination of the time dummies. Finally, β0, …, β12 are the coefficients to be estimated and δt are the season fixed effects. The second regression captures the propositions that the number of CEO changes (H1b) and the succession type (H2b) have negative and monotonic effects on the internationalization process rhythm. Again, we consider a moderating hypothesis (H3b) of ownership concentration on the relationship between number of CEO changes and the dependent variable. Consequently, the international process rhythm model is defined as follows:

been part of the panel at the end of the period of investigation. Table 1 summarizes the variables, Table 2 contains the descriptive statistics for the variables and their correlations. 4. Modeling approach 4.1. Model specification The theoretical framework considers the two dependent variables DOI growth and internationalization process rhythm. Accordingly, we specify a system of two regressions. The first equation captures the proposition that the number of CEO changes has an inverted U-shaped effect on DOI growth (H1a), while succession type has a positive and monotonic impact (H2a). Therefore, we included the main effect of number of CEO changes and succession type together with the quadratic form of number of CEO changes. Because we also consider a moderating hypothesis (H3a), we included the two-way interactions between the number of CEO changes (including the quadratic term of number of CEO changes) and ownership concentration. To enhance the interpretability of the results, all continuous variables were mean-centered before creating the higher order and interaction terms (Aiken & West, 1998). Formally, the DOI growth model is follows:

DOIit = β0 + β1 CEOSucit +

β2 CEOSucit2

IPRhyit = γ0 + γ1 CEOSucit + γ2 SucTypit + γ3 OwnConit + γ4 CEOSucit × OwnConit + γ5 FSizeit + γ6 ROAit + γ7 Assetsit + γ8 Ageit + γ9 Tenureit + γ10 Mortalit +

4.2. Endogeneity of number of CEO changes Our model allows for endogeneity in the number of CEO changes variables, which typically arises from reverse causality and the problem of self-selection. Both issues could apply here. For instance, a self-selection bias might have existed due to the “mortality of firms”. Similarly, reverse causality might be the result of firms purposely choosing their top management according to their capabilities and industry conditions (Shaver, 1998). This causes correlation between the error terms uit and εit and the number of CEO changes, leading to inconsistent effects of the regressor. To account for endogeneity, we adopt an instrumental variables (IV) approach. Such IVs isolate the exogenous variation in the endogenous

+ β8 ROAit + β9 Assetsit + β10 Ageit + β11 Tenureit + β12 Mortalit (1)

t

(2)

where coefficients γ0, …, γ9, capture the impact of the variables on the international process rhythm. Finally, ψt are the year fixed effects and εit is the error term.

+ β3 SucTypit + β4 OwnConit

∑ δt Yeart + uit ,

ψt Yeart + εit ,

t

+ β5 CEOSucit × OwnConit + β6 CEOSucit2 × OwnConit + β7 FSizeit +

∑

where i = firm, t = year, and uit is the standard error term. All variables are defined as shown in Table 1. Yeart are year dummies and capture changes over time. By including these dummies into our model, Table 2 Descriptive statistics and correlation matrix. Variable

1

2

3

4

5

6

7

8

9

10

11

1. DOI 2. IPRhy 3. CEOSuc 4. SucTyp 5. OwnCon 6. FSize 7. ROA 8. Assets 9. Age 10. Tenure 11. Mortal M SD

1 0.051 0.313* 0.061 -0.176* 0.320* 0.089* 0.169* -0.015 0.186* 0.187* 0.588 0.201

1 0.203* 0.044 -0.129* 0.400* 0.088* 0.172* 0.103* 0.079* 0.227* 1.476 2.668

1 -0.077* 0.059* 0.224* 0.018 0.168* -0.261* −0.140* 0.104* 1.395 1.245

1 -0.008 0.207* 0.029 0.080* 0.078* 0.050 0.020 0.728 0.445

−0.380* 0.056* -0.273* -0.279* -0.205* -0.185* 50.842 31.116

1 0.055* 0.625* 0.251* 0.123 0.365* 8.006 1.561

1 −0.013 0.025 -0.024 -0.031 0.156 2.471

1 0.182* 0.088* 0.217* 5,481.83 15,406.05

1 0.320* -0.036 55.337 6.106

1 0.180* 4.134 3.138

1 0.460 0.499

* p ≤ 0.05 (two-tailed tests).

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regressor by regressing it on the IVs and the exogenous variables in the system (Angrist & Krueger, 2001). We argue that stock price and dividend payments describe strong instruments as both can be seen as a sign of firm performance and therefore might influence the probability of a CEO change (Hermalin & Weisbach, 1998). Finally, we included the interaction effects of the two IVs with ownership concentration because the models in Eqs. (1) and (2) include interactions between ownership concentration and number of CEO changes (Luan & Sudhir, 2010). In our “Results” section, evidence for the strength of the IVs is provided.

multicollinearity does not constitute an issue and that the fixed effects estimation is indeed favored over a random option. Moreover, autocorrelation is detected in both regressions, while only the DOI growth model is affected by endogeneity. Thus, CEO changes do not seem to be affected by the internationalization process rhythm. To solve endogeneity issues, the results further suggest that the IVs are sufficiently strong.

4.3. Model estimation

Table 4 shows the parameter estimates for the DOI growth (Eq. (1)) and internationalization process rhythm (Eq. (2)) equations. The variables explain a statistically significant amount of variance in both models (R2DOI = 0.290, p < 0.01; R2IPRhy = 0.257, p < 0.01). In the “Additional Analyses” section, we provide further information about the validity and stability of the models’ predictions.

5.2. Hypotheses testing

There is also potential for autocorrelation, indicating the tendency for values of DOI growth and international process rhythm at one year to be correlated to values at nearby years. Prior research has shown that omitted variables such as firm risk can be correlated with internationalization variables thus producing correlation between values of the same variable (Reeb, Kwok, & Baek, 1998). To account for autocorrelation, generalized least squares (GLS) estimators are applied in this research as they are suggested to be more reliable than classical ordinary least squares ones. Moreover, not only the error terms of DOI growth and internationalization process rhythm can be correlated with the number of CEO changes (indicating endogeneity), there is also potential that the error terms of the two dependent variables are correlated. This might be the case because the both dependent variables represent variations of the degree of internationalization. To implement the instrumental variables approach and, at the same time, to account for potentially correlated error terms of the dependent variables, we allow for contemporaneous covariances and estimate a three-stage least squares (3SLS-GLS) model approach (Dinner, van Heerde, & Neslin 2014).

5.2.1. DOI growth equation The results show that the number of CEO changes has the expected inverted U-shaped effect on DOI growth, supporting H1a. While the linear term has a positive and significant impact (β1 = 2.96E-02, p < 0.01), the coefficient of the quadratic term of the number of CEO changes is also significant but has a negative sign (β2 = −8.94E-03, p < 0.01). This functional nature indicates that a medium level of number of CEO changes exists where positive and negative deviations from this turning point results in decreased DOI growth. As Fig. 4 shows, the turning point in this study lies at 3.049 and thus at around the midpoint of span of the number of CEO changes in our data, which ranges from 0 to 6. Referring to the three step procedure of Lind and Mehlum (2010) and Haans, Pieters, & He (2016) to test for an invertedU-shaped relationship all three conditions are met. The results in Table 4 further show that succession type has no significant effect on DOI growth (β3 = 1.21E-02, p > 0.10). Therefore, H2a is not supported. Similarly, we find no support for H3a suggesting the impact of number of CEO changes is moderated by ownership concentration. Neither is the interaction with the linear term (β5 = 1.24E-04, p > 0.10) significant nor does the interaction with the quadratic term (β6 = −1.06E-04, p > 0.10) significantly impact DOI growth. Considering the control variables, we find (marginally) significant and positive effects of firm size (β7 = 3.16E-02, p < 0.01) and firm profit (β8 = 5.37E-02, p < 0.10) on DOI growth. Negative impacts further are observed for firm assets (β9 = −1.10E-06, p < 0.05) and panel attrition (β12 = 2.86E-02, p < 0.05). We will further explore the mortality effect in our “Additional Analyses” section. Finally, we find no significant effects of individual CEO characteristics. Neither was the

5. Results 5.1. Specification tests Before interpreting model results, we test the model specification (see Table 3). First, we test for multicollinearity in each of our Eqs. (1) and (2) by inspecting the correlations between the explanatory variables and their variance inflation factors (VIF). Second, we run Hausman’s test to compare our fixed effects model specification with a random effects one. Third, we test for autocorrelation by applying Durbin-Watson test for serial correlation. Fourth, we use the HausmanWu test to inspect potential endogeneity in each of our two key equations. Fifth, we assess the strength of the IVs with an incremental F-test. The results of the tests are summarized in Table 3. They suggest that Table 3 Specification tests. Test

Outcome

Multicollinearity: The correlations in Table 2 are inspected and the variance inflation factors (VIFs) are estimated to test for multicollinearity in Eqs. (1) and (2).

The results indicate no multicollinearity issues. The maximum correlation is 0.625, which is below 0.8 (Judge et al., 1998). The VIFs are on average 2.371 (2.325) with a maximum value of 4.292 (3.500) for the DOI growth (internationalization process rhythm) model, which is well below 10 (Hair et al., 2010). The results indicate that a random specification would produce inconsistent coefficients in both the DOI growth (χ2(df = 11) = 47.275, p < 0.01) and the internationalization process rhythm (χ2(df = 9) = 20.028, p < 0.05) model. Thus, the fixed effects estimation is favored. The significance of the Durbin-Watson statistic for both the DOI growth (DW = 0.341, p < 0.01) and the internationalization process rhythm (DW = 0.481, p < 0.01) model point to autocorrelation in both dependent variables. The results suggest that endogeneity is only present in the DOI growth model (p < 0.05), but not in the internationalization process rhythm model (p = 0.142). The significance of the incremental F-test (F(df = 4) = 5.576, p < 0.01) suggests that the R2 of the second-step regression (including the IVs, R2 = 0.328) is significantly higher than the R2 of the first-step one (only exogenous variables, R2 = 0.301). Thus, the IVs are sufficiently strong.

Fixed vs. random effects modeling: A Hausman test is performed for each of the two Eqs. (1) and (2) to compare the fixed effects specfication with an alternative random one. Autocorrelation: For both Eqs. (1) and (2), Durbin-Watson (1971) test is used to test the significance of autocorrelation. Endogeneity in number of CEO changes: A Hausman-Wu test is applied to test for endogeneity in both key models. Strength of IVs: An incremental F-test assesses the strength of the instrumental variables. This implies three steps: (1) the endogenous regressor number of CEO changes is regressed against the exogenous variables; (2) the IVs are added; and (3) an incremental F-test is applied for the explanatory power of these IVs.

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Table 4 Estimation results. Dependent Variable Variable

DOI growth

Internationalization process rhythm

Main Effects Number of CEO changes Number of CEO changes2 Succession Type Ownership concentration

2.96E-02*** (8.89E-03) −8.94E-03*** (3.11E-03) 1.21E-02 (1.27E-02) −1.89E-04 (2.52E-04)

Moderating effects Number of CEO changes × ownership concentration Number of CEO changes2 × ownership concentration

1.24E-04 (1.96E-04) −1.06E-04 (9.26E-05)

Controls Firm size Firm profit Firm assets CEO age Tenure Panel attrition (mortality) Year dummies

3.16E-02*** (5.36E-03) 5.37E-02* (3.12E-02) −1.10E-06** (4.43E-07) 9.93E-04 (1.11E-03) 1.39E-03 (2.30E-03) −2.86E-02** (1.42E-02) included

7.84E-01*** (9.83E-02) 1.49E+00** (6.45E-01) −2.69E-05*** (7.23E-06) 2.85E-02 (1.95E-02) 5.21E-02 (3.78E-02) 1.64E-01 (2.68E-01) included

Constant R2 Adjusted R2

2.35E-01*** (7.49E-02) 0.290 0.261

−5.13E+00*** (1.30E+00) 0.257 0.224

H1a: ✓

2.89E-01** (1.14E-01)

H1b: ✓

H2a: ×

−5.91E-01*** (2.28E-01) −5.81E-04 (3.88E-03)

H2b: ✓

H3a: ×

4.10E-03 (2.61E-03)

H3b: ×

* p < 0.10, ** p < 0.05, *** p < 0.01 (two-tailed t-tests). The standard errors appear in parentheses.

succession type significantly and negatively impacts the rhythm variable (γ2 = −5.91E-01, p < 0.01). However, again, no support for H3b suggesting a moderating role of ownership concentration for the relationship between number of CEO changes and internationalization process rhythm is found. The respective interaction term had no significant effect (γ4 = 4.10E-03, p > 0.10). A reasoning for this missing effect will be discussed in the “Discussion” section. With respect to the control variables, we again find significant and positive effects of firm size (γ5 = 7.84E-01, p < 0.01) and firm profit (γ6 = 1.49E+00, p < 0.05), and a significantly negative effect of firm assets (γ7 = −2.69E-05, p < 0.01). Analogous to our results of the

effect of CEO age (β10 = 9.93E-04, p > 0.10) on DOI growth significant nor was the impact of tenure (β11 = 1.39E-03, p > 0.10). 5.2.2. Internationalization process rhythm equation Hypothesis 1b suggests that a high number of CEO changes leads to an irregular internationalization rhythm. The results in Table 4 support this proposition. The number of CEO changes has a significant and positive effect on internationalization process rhythm (γ1 = 2.89E-01, p < 0.05). Similarly, H2b is supported, which predicted that internal succession has a negative effect on the internationalization rhythm leading to a more regular rhythm than external succession. We find that

Fig. 4. Inverted U-shaped relationship between DOI growth and number of CEO changes.

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new strategic decision-maker tries to establish his/her own way of doing business, including the direction and amount of internationalization. New internationalization steps are made to broaden the firm’s foreign activities and to demonstrate the individual capacity and motivation of the CEO. This holds true until turbulence due to too many CEO changes reverse the effect. Our results also support our hypothesis concerning the succession type: The assignment of external successors leads to a higher DOI growth compared to the one of internal successors. In contrast to our suggestion, we could not find a significant effect for succession type on DOI growth. This might be the case as advantages of outside successors as e.g. outside knowledge do not outweigh familiarity with internal processes. Furthermore, a low concentration of ownership does not promote the effect of hypothesis 1a which refers to the number of CEO changes. It seems as if the influence of new CEOs on the DOI growth is not dependent on the ownership concentration. One could argue that the perceptions of internationalization or, more precisely, the pursued DOI growth, do not necessarily need to be that different between CEOs and the shareholders: Shareholders view internationalization as a means to increase firm value and ROI, whereas CEOs use internationalization to (also) realize personal goals as discussed in the context of developing our hypotheses which would result in a homogenous behavior of both parties regarding DOI growth. We found similar results for our second dependent variable, i.e., the rhythm of the internationalization process. As every new CEO has his/ her own ideas on how the internationalization process of the firm should be continued, the more CEO changes a firm has, the more irregular the internationalization process rhythm is. If a firm has a high number of CEO succession events in its history, it is less likely for the firm to show symptoms of organizational inertia which might be expressed through a more regular rhythm. If the decision-maker is an external CEO, our regression results support the assumption that the rhythm of the internationalization process will be more irregular. This can be explained by different modes of socialization. External CEOs are socialized in other firms, which may have a different internationalization philosophy to the current firm. As they establish the ‘old’ philosophy/philosophies in the new firm, the internationalization behavior changes with every external CEO, which has also been shown by Lin and Liu (2012) for Taiwanese firms concerning DOI growth. However, if new CEOs come from inside the firm, the socialization has already taken place directly or indirectly through the former CEO and existing firm policies, leading to a similar internationalization path to that in the past (Shen & Cannella, 2002). Therefore, an internal CEO succession will lead to a more regular internationalization process rhythm. Analogously to our findings for DOI growth, a low concentration of ownership does not significantly promote the effect of the number of CEO changes on the internationalization rhythm. We could once again argue that new CEOs enforce their vision of developing international business implicitly in line with the interest of the major owners so that ownership concentration has no significant impact on the DOI growth and the internationalization process rhythm.

DOI growth model, no impact of CEO characteristics is observed. Both the effect of CEO age (γ8 = 2.85E-02, p > 0.10) and tenure (γ9 = 5.21E-02, p > 0.10) on internationalization process rhythm are not significant. This time, also the panel attrition variable had no significant impact (γ10 = 1.64E-01, p > 0.10). 5.3. Additional analyses To validate the model, we conduct two additional analyses. First, we apply Heckman’s (1977) correction procedure as an alternative approach to correct for the endogeneity detected in the DOI growth model. This procedure particularly deals with the selection bias that might have caused the correlation of the error term uit and the endogenous regressor number of CEO changes. In our main analysis, we identified a significant effect of panel attrition on DOI growth, indicating that mortality has potentially affected the results. To correct for endogeneity, the Heckman procedure involves two steps. First, a binary probit model on all firms is estimated. We regress whether a firm is in the study across the full observation period. From this probit model, we compute the inverse Mills ratio for each firm that, in a second step, is added as an additional explanatory variable in the main model. The results reveal a significant effect of the inverse Mills ratio on DOI growth, thus suggesting the need to correct for endogeneity in the model. Applying the Heckman correction did not change parameters compared to the 3SLS-GLS approach from above. Again, we find strong support for the inverted U-shaped impact of number of CEO changes on DOI growth (β1 = 7.59E-02 (SE = 4.54E-02), p < 0.10; β2 = −1.19E02 (SE = 5.49E-03), p < 0.05), but no such relevance of the succession type (β3 = 1.67E-02 (SE = 1.67E-02), p > 0.10). Thus, the validity and stability of our results are supported for an alternative estimation approach. Second, we test robustness of the results for an alternative measure of number of CEO changes. Instead of counting all successions in the observation period, only the dismissals of the last 5 years are summed up. This should address concerns that the number simply increases because more observations are available. We estimate the 3SLS-GLS model from the main analyses but now replace the original measure by the five-year count. The results replicate the findings for the full-period count measure. An inverted U-shaped relationship is found for the link between the number of CEO changes and DOI growth (β1 = 2.25E-02 (SE = 1.33E-02), p < 0.10; β2 = −-2.62E-02 (SE = 9.48E-03), p < 0.01), while succession type had no effect (β3 = 3.59E-03 (SE = 1.27E-02), p > 0.10). Considering the international process rhythm model, the results of this additional analysis again reveal a significant and positive effect of number of CEO changes (γ1 = 6.19E01 (SE = 2.27E-01), p < 0.01), while the effect appears negative for succession type (γ2 = −5.76E-01 (SE = 2.28E-01), p < 0.05). Thus, the validity and stability of our results are also supported for this alternative measure. 6. Discussion

6.1.2. Practical implications Our study offers several practical implications which might help multinational firms to be successful. These implications refer to the following aspects: (1) considering the CEO as influencing factor of internationalization processes, (2) advance forecasting instruments to capture the irregularity of internationalization processes, (3) establishing the right control and incentive mechanisms, (4) foreseeing the behavior of competing firms, (5) calling for a more systematic planning of future CEO successions, and (6) the findings illustrating the influence of CEO changes in a context with rather restrictive rules for managerial discretion. 1) We showed that the individual decision-maker has a great influence on the strategic direction of the internationalization of a firm. Owners should therefore take the CEO into account as the most

6.1. Implications and contributions 6.1.1. General implications This paper examines the influence of CEOs as strategic decisionmakers on the internationalization processes of firms. We found that the decision-maker is largely ignored in internationalization process theory, although researchers have acknowledged the influence of the decision-maker in driving firm-level outcomes in strategic management literature (e.g., Child, 1972; Hambrick & Mason, 1984). This is in line with recent papers which call for more research combining the topics of international business, strategy and organizations (Dutta, Malhotra, & Zhu, 2016). Our empirical results indicate that a growing number of CEO changes leads to a higher DOI growth until this relationship decreases again. This supports our assumptions that every 10

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internationalization process research. However, as internationalization is nowadays a conditio sine qua non for firms, international management research should try to close this gap. Our study therefore enlarges the knowledge about different facets of CEO succession events and CEO characteristics and their influence on the DOI growth as well as on the internationalization process rhythm. By considering the DOI growth and the internationalization process rhythm over time, we provided insights into the dynamic nature of internationalization, in contrast to prior studies, which often looked at internationalization in a static way. We also contributed to the call for more longitudinal research in international business by conducting a panel regression over 23 years (e.g., Scandura & Williams, 2000; Van de Ven & Huber,1990). The size of the sample (regarding the length of observation time) enabled us to capture a curvilinear DOI growth. The results of our study hint that small samples might conceal the “real” shape of relationship, as other studies with a limited sample size might assume linear relationships, because they only capture the “first half” of the curve.

powerful decision-maker when deciding about the future internationalization strategy of the firm. This is especially true for CEO succession events. A fast DOI growth is often interpreted as a sign of an agile, modern and attractive firm and is often associated with a good firm performance. Therefore, appointing a new CEO seems to be an adequate tool to establish new strategies in the firm and to help to overcome organizational inertia as a new CEO tends to initially foster additional internationalization activities. However, if the number of CEO successions is too high, the effect will be the contrary. Assuming that a more steady development of international activities, i.e., a more regular internationalization process rhythm, is often associated with a better performance (Vermeulen & Barkema, 2002), the number of CEO succession events should not be too high over a certain period of time (Albach & Freund, 1989). This effect of the CEO on the internationalization strategy of a firm should also be considered, as the handling of discontinuities is one of the major tasks of firms. This is even more important today as the number of CEO changes increases and the average tenure of CEOs decreases as a result (Kaplan & Minton, 2012). 2) Our study shows that internationalization processes do not always develop in a linear and regular way, but can be influenced by unpredictable events (e.g., CEO changes). However, many of the “classical” forecasting instruments of strategic management for extrapolating a trend line will be inefficient in this case. Knowing about these shortcomings might help decision-makers to make better decisions, as they would then not simply rely on certain forecasting results, but keep the role and influence potential of heterogeneous individuals in mind. Furthermore, our study emphasizes the necessity of the development of new instruments of strategic management with regard to unpredictable events in order to yield reliable results. 3) As managers might try to implement their own personal internationalization goals, no matter whether these are consistent with the firm-level internationalization strategy, it is important for companies to establish the right control and incentive mechanisms to identify and prohibit selfish behavior of managers. If owners (or their representatives) are aware of the possibility that a manager might pursue too many personal goals, they can more easily take specific measures to prevent this from happening. This contribution is in line with the findings of Tuschke and Sanders (2003) who state that agency control mechanisms in other firms than US firms remain largely unexplored. 4) The results of our study might also sensitize managers with regard to the behavior of competing firms. It is helpful for practitioners to know that the rival firm’s way of internationalizing can be influenced by CEO changes as well as personal internationalization preferences. This might support the decision-makers’ efforts to foresee and respond to competitors’ strategies. 5) Our findings suggest that CEO changes are a source of disruption for companies. However, the systematic planning of future CEO successions is often disregarded as part of strategic human resource management, as these events only happen infrequently. In order to attenuate the negative consequences of succession events, it is essential to recognize the strategic importance of this issue and invest resources in a systematic succession planning. 6) Our study is another indicator of the robustness of other results regarding the influence of CEOs on strategic decisions. By studying CEO changes in German firms, i.e. in a context with a strict separation of supervisory board and management board in which it should be by definition much harder for a CEO to pursue personal goals, our study still arrives at the conclusion that the CEO has significant influence.

7. Limitations and future research Our study has specific limitations that offer possibilities for future research in the field. First, our study was limited to large German companies which, on the one hand, allows for the control for homecountry institutional effects. This is especially true because Germany is an institutionally developed country with relatively stable environmental factors (Baum, Schwens, & Kabst, 2015). However, on the other hand, our study only provides insights into the CEO changes and internationalization behavior of firms in one single country. It should be noted that the corporate governance model of German firms may provide a unique environment for CEOs and CEO succession events which may influence the findings of the study. Focusing on German firms, our study reveals the effects of CEO succession on the internationalization behavior of firms in a country with rather restrictive rules for managerial discretion as mentioned above. This distinguishes our study especially from those dealing with US companies, in which the CEO has a much broader managerial discretion, which even adds weight to our findings. We explicitly relied on a German sample because it provides the above mentioned specific advantages. However, as we do not include any certain country-level characteristics which can only be found in Germany, our study does not have to be limited to the German context (this perspective is also in line with other studies referring to a German sample, e.g., Oehmichen et al., 2017). Another point to consider is related to the industry of our sample companies. We chose manufacturing firms on purpose to keep industry factors constant. This should be kept in mind should the findings of our study be transferred to other sectors, e.g., the service industry. Future research should analyze similar panel data for companies based in other markets and industries to identify the influence of different corporate governance mechanisms, cultures and industries. It would be interesting to gauge whether these aspects might have an effect on the outcomes of the study. Secondly, our paper is limited in terms of non-consideration of the reasons why CEO succession events occur. As we are aware of the fact that this has consequences on the succession itself and therefore on the internationalization process of the firm, future research should include this to fully understand the relationship. Thirdly, it would also be interesting to examine how different owner types influence our study. We believe that considering different ownership types (e.g. the state, private-sector, family or foreign ownership) might bring up interesting insights as it can be expected that the type of ownership on the one hand influences the degree of control exercised on the CEO and on the other hand has an effect on the internationalization goals pursued. E.g. it is conceivable that as foreign owners – who are per se more familiar with an international setting – will expect a CEO to pursue a higher degree of internationalization compared to state owned companies which might also pursue other

6.1.3. Theoretical implications With these insights into the influence of the individual decisionmaker on the internationalization process, we contribute to the existing body of literature in international business. We identified a research gap by showing that the role of individual decision-makers has already been the focus of research in other fields of management but not in 11

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goals besides profit maximization and therefore might not provide managers with the right incentives to increase internationalization. Fourthly, another limitation refers to the dimensions of the internationalization process we considered. Future studies on the influence of CEO succession on the internationalization process should consider further measures of DOI growth and rhythm or further dimensions of the process itself in order to enrich the respective information content and to fit the respective theorizing better with the empirical methods. It would also be interesting to see how succession and the internationalization processes of firms interact with performance. Due to the heterogeneous and sometimes contradictory results of the internationalization-performance relationship (for an overview, see Contractor, Kundu, & Hsu, 2003; Glaum & Oesterle, 2007), it might be promising to integrate these three dimensions into one model to receive further insights into their interaction. However, we assume that investigating the CEO’s influence on the DOI growth as well as on the rhythm of internationalization is a first step in the right direction to gain a deeper understanding of drivers, modes and consequences of internationalization processes. We would like to encourage all researchers to further engage in this topic. Future research should e.g. take a closer look at the circumstances of a CEO change e.g. its reasons. It would be great to see whether results differ if the dismissal has been forced or unforced. We also believe that including more characteristics of CEOs will help to understand why they undertake a certain internationalization step. Of course we would also like to encourage all researchers to further think about the development of other measures to capture a firm’s internationalization. Furthermore, we are curious whether other studies with another country sample will confirm our results. We also hope that managers and owners will be encouraged to keep in mind the close link between CEO changes and the respective internationalization strategy. References Aggarwal, R. K., & Samwick, A. A. (2003). Why do managers diversify their firms? Agency reconsidered. Journal of Finance, 58(1), 71–118. Agrawala, A., Knoeber, C. R., & Tsoulouhas, T. (2006). Are outsiders handicapped in CEO successions? Journal of Corporate Finance, 12(3), 619–644. Aharoni, Y., Tihanyi, L., & Connelly, B. L. (2011). Managerial decision-making in international business: A forty-five-year retrospective. Journal of World Business, 46(2), 135–142. Aiken, L. S., & West, S. G. (1998). Multiple regression: Testing and interpreting interactions. Sage: Newbury Park. Albach, H., & Freund, W. (1989). Generationswechsel und Unternehmenskontinuität. Gütersloh: Verlag Bertelsmann Stiftung. Amihud, Y., & Lev, B. (1981). Risk reduction as a managerial motive for conglomerate mergers. The Bell Journal of Economics, 12(2), 605–617. Amihud, Y., & Lev, B. (1999). Does corporate ownership structure affect its strategy towards diversification? Strategic Management Journal, 20(11), 1063–1069. Angrist, J., & Krueger, A. B. (2001). Instrumental variables and the search for identification: From supply and demand to natural experiments. Journal of Economic Perspectives, 15(4), 69–85. Annavarjula, M., & Beldona, S. (2000). Multinationality-performance relationship: A review and reconceptualization. International Journal of Organizational Analyses, 8(1), 48–67. Baltagi, B. H. (2005). Econometric analysis of panel data (3rd ed.). Chichester: John Wiley & Sons. Barkema, H. G., & Shvyrkov, O. (2007). Does top management team diversity promote or hamper foreign expansion? Strategic Management Journal, 28(7), 663–680. Barney, J. B., & Hesterly, W. (1996). Organizational economics: Understanding the relationship between organizations and economic analysis. In S. R. Clegg, C. Hardy, & W. R. Nord (Eds.). Handbook of organization studies (pp. 115–147). London: Sage. Baum, M., Schwens, C., & Kabst, R. (2015). A latent class analysis of small firms’ internationalization patterns. Journal of World Business, 50(4), 754–768. Bausch, A., & Krist, M. (2007). The effect of context-related moderators on the internationalization-performance relationship: Evidence from meta-analysis. Management International Review, 47(3), 319–347. Beatty, R. P., & Zajac, E. J. (1994). Managerial incentives, monitoring, and risk bearing: A study of executive compensation, ownership, and board structure in initial public offerings. Administrative Science Quarterly, 39(2), 313–335. Berle, A. A., & Means, G. C. (1932). The modern corporation and private property. New York. Bigley, G. A., & Wiersema, M. F. (2002). New CEOs and corporate strategic refocusing: How experience as heir apparent influences the use of power. Administrative Science Quarterly, 47(4), 707–727. Calof, J. L. (1994). The relationship between firm size and export behavior revisited.

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