Why are CEOS Rarely Fired? Evidence from Structural Estimation

51 Pages Posted: 16 Feb 2009

See all articles by Lucian A. Taylor

Lucian A. Taylor

University of Pennsylvania - The Wharton School

Date Written: August 5, 2008

Abstract

Two percent of CEOs are fired per year on average. To evaluate this magnitude, I solve and estimate a dynamic model of forced CEO turnover. The model features costly turnover and learning about CEO ability. To rationalize the two percent firing rate, boards must behave as if replacing the CEO costs shareholders 5.9% of the firm's assets. This cost mainly reflects CEO entrenchment and poor governance ather than a real cost for shareholders. In terms of both direction and magnitude, the model helps explain the relation between CEO firings and tenure, profitability, and stock returns.

Keywords: CEO, succession, structural estimation

Suggested Citation

Taylor, Lucian A., Why are CEOS Rarely Fired? Evidence from Structural Estimation (August 5, 2008). EFA 2009 Bergen Meetings Paper. Available at SSRN: https://ssrn.com/abstract=1342547 or http://dx.doi.org/10.2139/ssrn.1342547

Lucian A. Taylor (Contact Author)

University of Pennsylvania - The Wharton School ( email )

3641 Locust Walk
Philadelphia, PA 19104-6365
United States

HOME PAGE: http://finance.wharton.upenn.edu/~luket/

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