New Firm Performance and the Replacement of Founder‐CEOs

We study some causes and consequences of the replacement of founder-CEOs by non-owner managers in a sample of 4,172 Danish single-founder startups. In contrast to the extant literature on VC-financed firms, replacements among firms in our sample are more likely among the worst- and best-performing firms, and replacement is not unambiguously associated with better subsequent performance. Firms that replaced the founder as CEO were much more likely to fail, but the surviving firms among them grew considerably faster. We also analyze prefounding and post-turnover earnings and occupational choices of founders who rescinded operating control of their firms. Founders with pre-founding income in the tails of the distribution are more likely to be replaced as CEOs. Although subsequent founder income is increasing in the performance of their firms, those that left good firms were no more likely than others to found another business. Our results are consistent with the notion that founder-CEO replacement is driven in part by mismatches between business quality and founder ability.