The Longer the Better? The Impact of Internal vs. External CEO Hires and Tenure on Organizational Performance: Evidence from the Banking Industry of the Republic of Korea

Abstract

This study investigates the effect of internal vs. external CEO hiring and cumulative presidency on bank profitability (return on assets, return on equity) and asset quality (substandard loans, nonperforming loans) in the Republic of Koreas banking industry. We also try to find evidence of a nonlinear effect of long-term CEO tenure to check whether it gradually increases or decreases over time. Using the panel data of five state-owned banks, six private banks and six local banks from 2000-2019, we found that CEOs hired from the inside improve performance more than those hired from the outside and that CEOs with long tenures do as well. However, an investigation of a non-linear term of tenure yields an inverted u-curve, meaning the effect of longer tenure dissipates over time. These results thus offer reasons to avoid the short-termism that prevails today. The coefficient of the main regressors remained mostly the same with several robustness tests.