Stock Market Liquidity and Short-Termism-Driven CEO Turnover

Abstract:     
Does an improvement in stock market liquidity make the shareholders more short-term oriented in firing the CEO? An improvement in stock market liquidity could have two opposing effects on short-termism: (1) the market could become more efficient and encourage shareholders to allow more long-term R&D investments; or (2) transient institutional investors (Bushee, 1998) could have increased flexibility to unwind their position, making the company more short-term oriented. Using data on CEO turnover of Execucomp firms from 1993 to 2009, we find that shareholders, in general, became more tolerant of long-term R&D investments in firing the CEOs after decimalization, an exogenous increase in liquidity. However, for firms with high ownership by transient institutions, the change was significantly smaller. Moreover, after decimalization, firms that dismiss their CEOs under pressure of transient institutions are more likely to reduce their R&D investments after the replacement. Our event study reveals that stock market investors see through and respond negatively to short-termism-driven CEO turnover.

Number of Pages in PDF File: 57

Keywords: ceo turnover, institutional investors, transient institutions, short-termism, R&D

JEL Classification: G30, G34

working papers series