Information, Incentives and CEO Replacement

45 Pages Posted: 19 Aug 2019

See all articles by Xiaojing Meng

Xiaojing Meng

New York University (NYU) - Department of Accounting

Date Written: August 15, 2019

Abstract

This paper provides a new explanation for CEO turnover. In an environment in which all potential CEOs are endowed with the same ability and the firm is not looking for a strategy change, I demonstrate that CEO turnover may still occur in equilibrium. Specifically, a performance-contingent CEO replacement policy changes the reward structure of the departing CEO and thereby helps reduce excessive compensation earned by a CEO who stays on the job. At the same time, hiring a new CEO to implement the project also implies that the newly hired CEO will receive a limited liability rent. The trade-off between the benefit and cost of CEO replacement may lead firms to optimally commit to a more aggressive CEO replacement policy than the one that is ex-post efficient.

Keywords: CEO replacement, CEO compensation, Severance pay, Information rent

Suggested Citation

Meng, Xiaojing, Information, Incentives and CEO Replacement (August 15, 2019). NYU Stern School of Business, Available at SSRN: https://ssrn.com/abstract=3437910 or http://dx.doi.org/10.2139/ssrn.3437910

Xiaojing Meng (Contact Author)

New York University (NYU) - Department of Accounting ( email )

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