Working Paper: NBER ID: w12068
Authors: Dirk Jenter; Fadi Kanaan
Abstract: This paper examines whether CEOs are fired after bad firm performance caused by factors beyond their control. Standard economic theory predicts that corporate boards filter out exogenous industry and market shocks to firm performance when deciding on CEO retention. Using a new hand-collected sample of 1,590 CEO turnovers from 1993 to 2001, we document that CEOs are significantly more likely to be dismissed from their jobs after bad industry and bad market performance. A decline in the industry component of firm performance from its 75th to its 25th percentile increases the probability of a forced CEO turnover by approximately 50 percent. This finding is robust to controls for firm-specific performance. The result is at odds with the prior empirical literature which showed that corporate boards filter exogenous shocks from CEO dismissal decisions in samples from the 1970s and 1980s. Our findings suggest that the standard CEO turnover model is too simple to capture the empirical relation between performance and forced CEO turnovers, and we evaluate several extensions to the standard model.
Keywords: CEO turnover; performance evaluation; corporate governance; market shocks; industry performance
JEL Codes: G30; G34; D20; D23; M51
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Performance in recessions (E32) | CEO quality evaluation (M12) |
| Negative performance shocks to peer group (C92) | Increased likelihood of forced CEO turnover (G34) |
| Decline in industry component of firm performance from 75th to 25th percentile (L19) | Increased probability of forced CEO turnover (G34) |
| Peer group performance (C92) | CEO dismissals (M12) |
| Boards fail to filter exogenous shocks (F65) | CEO turnover decisions (M12) |