The combination of carbon monoxide with palladium chemistry has been demonstrated to be a promising tool for the synthesis of carbonyl compounds, and relative mechanistic studies are desirable to take this field one step further. In this manuscript, density functional theory calculations were performed to investigate the mechanism and origin of stereoselectivity of Pd-catalyzed cascade annulation of aryl iodide, alkene, and carbon monoxide to access the core of cephanolides B and C. It was found that the favorable mechanism proceeds via oxidative addition of Ar-I bond, migratory insertion of the C═C bond, CO insertion into the Pd-(sp3) bond, Ar-H activation, and C(sp2)-C(sp2) reductive elimination. The Ar-H activation is the rate-determining step and goes through an I-assisted outer-sphere concerted metalation-deprotonation mechanism. The C═C bond insertion is irreversible and controls the stereoselectivity. In contrast, other two pathways involving the direct Ar-H activation after the C═C bond insertion is less favored because of the following difficult CO insertion on the palladacycle intermediate. Further calculations well reproduced the experimental results, which supports the rationality of our computation. Meanwhile, the influence of the steric effect of three substitution sites on the stereoselectivity was disclosed, which should be helpful to the further experimental design in the synthesis of analogues.