Long-Term CEO Contracts, Turnover, and Risk Taking
University of Toronto - Department of Economics; Tilburg Law and Economics Center (TILEC)
London School of Economics & Political Science (LSE)
We introduce a novel measure of CEO career concerns: the distance to contract expiration. Using a sample of 3,954 CEO employment contracts, we show that the distance to contract expiration predicts CEO turnover and that CEO turnover is sensitive to performance only when contracts are close to expiration. We use within-CEO variation in contract-related turnover probability to isolate the effect of career concerns on risk taking. Protection against dismissal should encourage CEOs to engage in projects with less certain outcomes. We find that firms exhibit higher return volatility, higher idiosyncratic risk, and invest more when CEO turnover probability is low.
Number of Pages in PDF File: 59
Keywords: Risk taking, volatility, career concerns, CEO contracts, CEO turnover
JEL Classification: G34, J41, J63
Date posted: October 22, 2013 ; Last revised: November 17, 2016