Performance Surprises and Uncertain Managerial Ability: Evidence from CEO Turnovers
51 Pages Posted: 13 Mar 2008 Last revised: 2 Apr 2009
Date Written: October 1, 2008
We document that the number of past quarterly performance surprises: earnings decreases, negative analysts' forecast errors, and negative stock returns, are positively related to the likelihood of CEO dismissal. This relation declines over a CEO's tenure, consistent with performance surprises revealing information about uncertain managerial ability. We also show that CEO tenure affects firm governance characteristics: tenure is positively associated with CEO ownership and CEO-chair duality, and negatively associated with board independence. Results suggest that periodic performance reports increasingly resolve uncertainty about managerial ability thereby affecting a firm's demand for monitoring its CEO over the CEO's tenure.
Keywords: CEO turnover, Governance, Monitoring, Earnings Surprise, CEO tenure
JEL Classification: G34, G29, G32, J41, M41, M51
Suggested Citation: Suggested Citation