The king is dead, long live who?
This study investigates the financial impact on small and medium-sized enterprises (SMEs) following the sudden death of their CEO-owner.
It examines how the embeddedness of the successor – whether they are a family member or have long tenure in the firm – affects the firm’s financial distress and recovery.
Key findings
- Inverse U-shaped financial distress: After a CEO-owner’s sudden death, SME financial distress initially worsens, peaks, and then gradually improves.
- Short-term vs long-term recovery: Nonfamily successors are more effective in reducing financial distress in the short term. However, in the long run, family successors lead to better financial recovery.
- Importance of firm embeddedness: Successors with longer tenure in the firm consistently help reduce financial distress both in the short and long term.
- Best and worst outcomes: The worst outcomes occur when a family successor lacks firm embeddedness. The best results are seen when a successor, whether family or nonfamily, has strong firm embeddedness.
Why this matters: links to global priorities
The findings support several United Nations Sustainable Development Goals (SDGs).
- SME stability: By identifying effective succession strategies, the study supports SME stability, preventing business closures and job losses.
- Crisis management and innovation: The findings help SMEs adopt crisis management and leadership transition strategies to maintain innovation and competitiveness.
- Long-term sustainability: Promoting long-term SME sustainability helps avoid inefficient resource losses caused by sudden leadership transitions.
- Business resilience and governance: The study contributes to business resilience and governance research, offering evidence-based policy insights for SME succession planning.
Practical applications
The study provides practical guidance for SME owners, policymakers and business advisors.
- Succession planning: SME owners should proactively prepare for unexpected leadership changes, emphasizing firm-embeddedness in successor selection.
- Crisis management: Businesses should recognize that financial distress after a CEO-owner’s sudden death follows a predictable pattern, and proper leadership selection can mitigate risks.
- Policy recommendations: Governments and business organizations can develop support programs for SMEs experiencing leadership crises to reduce failure rates.
- Family business strategy: Family firms should ensure that next-generation successors gain firm experience before succession to enhance long-term stability.
This research was conducted by:
- Francesco Chirico (Macquarie University and Jönköping University, Co-Director of the Macquarie University Innovation, Strategy and Entrepreneurship (ISE) Research Centre)
- Robert E Hoskisson (Rice University)
- Seemantini Pathak (Ivey Business School, Western University)
- Massimo Baù (Jönköping University).