New CEOs and Old SG&A: Managing Inherited Intangible Assets

ABSTRACT We consider the role of inherited intangible assets in the performance of newly appointed CEOs. Using selling, general, and administrative expenses (inclusive of research and development expenses) to measure investments in intangible assets we find that, on average, CEOs manage inherited intangible assets less well than their own investments in intangibles. Turnovers involving outside successors drive this result. Industry-year and firm fixed effects help rule out explanations that industry conditions or heterogeneity across firms explain our results. The results are robust to controls for the outgoing CEO’s performance and continue to hold on a subsample of firms conducting restructuring activities coincident with CEO turnover. Higher SG&A spending in the final two years of outgoing CEOs’ tenures reduces the likelihood that boards select outside replacements following voluntary turnovers, suggesting boards are aware of the problems of managing inherited intangible assets. Data Availability: The data underlying this article are subject to third-party restrictions. The data that support the findings of this study are available from Standard & Poor’s via its Compustat and Execucomp data products. Restrictions apply to the availability of these data, which were used under license for this study. The forced turnover data come from two sources. Some were provided by Dirk Jenter. We also obtained forced turnover data at https://doi.org/10.5281/zenodo.4543893. Hand-collected data from annual reports are available upon request. JEL Classifications: M40; J24; J41; J63.