CEO Tenure, Performance and Turnover in S&P 500 Companies

Abstract:     
The centrality of the CEO is reflected in the empirical literature linking CEO turnover to poor firm performance. However, less is known about the institutional and personal correlates of CEO turnover. In this study, we find two CEO characteristics interact with turnover: tenure and ownership. We interpret our results as indicating that CEOs of S&P 500 firms divide into two groups with different tenure patterns – “owners” (who have large personal shareholdings) and “managers” (who have smaller holdings). The tenure of manager-CEOs (as opposed to owner-CEOs) exhibits a term structure loosely similar to the one produced by the tenure process at academic institutions. Turnover of all kinds is low during a CEO’s first four years on the job, but heavily dependent on performance. In contrast, once a CEO reaches her fourth year, retirements begin a multi-year increase and exits via merger exhibit a large one-year spike. These term effects are strongest for relatively young CEOs. We also find that forced exit, retirement, and deals covary and do not substitute for one another as modes of CEO turnover. Forced exits and deals are both related to poor performance, albeit on different metrics, while retirements other than forced exits are unrelated to firm performance.

Keywords: CEO tenure, CEO turnover, acquisitions, retirement, CEO shareholdings, S&P 500 companies

JEL Classifications: K22, M12, M51

Working Paper Series