CEO Turnover and Accounting Earnings: The Role of Earnings Persistence

Management Science, Forthcoming

45 Pages Posted: 30 Jan 2020

See all articles by Inho Suk

Inho Suk

State University of New York (SUNY) at Buffalo - School of Management

Seungwon Lee

Pennsylvania State University Harrisburg

William Kross

State University of New York (SUNY) at Buffalo - Department of Accounting

Date Written: December 1, 19

Abstract

Although earnings persistence should have a nontrivial impact on CEO turnover decisions, prior studies have paid little attention to the role of earnings persistence in CEO turnover decisions. This study examines the effect of earnings persistence on the sensitivity (i.e., the negative relation) of CEO turnover to earnings performance. First, we find that the sensitivity of forced CEO turnovers to earnings performance is greater when earnings are more persistent. We also show that among numerous earnings attributes, earnings persistence is the most direct and dominant attribute in explaining CEO turnover-earnings sensitivity. Further, when the effect of earnings persistence on CEO compensation-earnings sensitivity is weak, the effect of earnings persistence on CEO turnover-earnings sensitivity is stronger, suggesting that the executive discipline system substitutes for the compensation system when earnings persistence is neglected by compensation policies. Overall, our findings suggest that earnings persistence plays a crucial role in CEO turnover decisions by elevating the board’s knowledge on the future performance implications of current earnings. Finally, the role of persistence is even more crucial when it is neglected by executive compensation policies.

Keywords: Earnings persistence; CEO turnover; CEO turnover-performance sensitivity; Pay-performance sensitivity; Corporate governance

JEL Classification: G34; M41

Suggested Citation

Suk, Inho and Lee, Seungwon and Kross, William, CEO Turnover and Accounting Earnings: The Role of Earnings Persistence (December 1, 19). Management Science, Forthcoming. Available at SSRN: https://ssrn.com/abstract=3516091

Inho Suk (Contact Author)

State University of New York (SUNY) at Buffalo - School of Management ( email )

342 Jacobs Management Center
Buffalo, NY 14260-4000
United States
716-645-3215 (Phone)

Seungwon Lee

Pennsylvania State University Harrisburg ( email )

777 W. Harrisburg Pike
Middletown, PA 17057
United States

William Kross

State University of New York (SUNY) at Buffalo - Department of Accounting ( email )

Buffalo, NY 14260
United States

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