CEO Turnover and Accounting Earnings: The Role of Earnings Persistence
Management Science, 67 (5): 2657-3320, 2021
45 Pages Posted: 30 Jan 2020 Last revised: 15 Dec 2021
Date Written: December 1, 2019
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: Suggested Citation