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Research summary: Drawing on theory about signaling, sensemaking, and the romance of leadership, we extend inquiry on investors' perceptions of CEO succession following misconduct. Whereas past studies have treated misconduct monolithically, we examine failures of integrity and competence separately. Using a policy capturing methodology that isolates investors' decision making from potential confounds, we find that, following an integrity failure, investors perceive outside and interim successors positively but inside successors negatively. Following a competence failure, investors perceive outside successors positively but are ambivalent toward inside and interim successors. Our findings indicate that whether an act of misconduct was an integrity failure or a competence failure, and what type of successor the firm chooses, are important considerations when using CEO succession as a means to restore investor confidence. Managerial summary: Business headlines regularly feature episodes of organizational misconduct, such as product safety problems, environmental violations, employee mistreatment, and securities lawsuits, and their aftermath. In such scenarios, shareholders demand answers from the people at the top, even if those people were not directly responsible for the problem. As a result, companies often fire the CEO as a means to restore investor confidence. Does this work? It depends on the type of misconduct and who is the CEO's successor. Following a competence failure, investors welcome the appointment of an outsider, but they are indifferent to inside and interim successors. Following an integrity failure, shareholders greet outside and interim CEO successors favorably while frowning on the promotion of insiders. Copyright © 2015 John Wiley & Sons, Ltd. [ABSTRACT FROM AUTHOR]
