Big Shoes to Fill: CEO Turnover and Pre-Appointment Firm Performance

57 Pages Posted: 10 Sep 2020 Last revised: 11 May 2022

See all articles by Miguel Minutti-Meza

Miguel Minutti-Meza

University of Miami - Department of Accounting

Dhananjay Nanda

University of Miami - Department of Accounting

Rosy Xu

The Chinese University of Hong Kong

Date Written: March 25, 2022

Abstract

Bayesian learning implies that corporate owners’ performance expectations for their CEO are affected by both the CEO’s expected managerial ability and their firm’s performance observed prior to the CEO’s appointment. Consistent with this framework’s implications, we document that the sensitivity of CEO turnover to firm performance increases in pre-appointment firm performance; that is, an underperforming CEO is more (less) likely to be dismissed when appointed at a firm with comparatively better (worse) pre-appointment performance. Further, we show that the effect of pre-appointment performance increases in firm uncertainty and declines over a CEO’s tenure. We find no evidence that the effect is due to the incumbent CEO’s ability, corporate governance quality, or the cost of replacing a CEO. Overall, our results suggest that CEOs indeed face a “big shoes to fill” effect that affects the likelihood of their performance-related turnover.

Keywords: CEO turnover, Bayesian learning, relative performance evaluation, target setting, corporate governance

JEL Classification: G34, J63, M12, M51

Suggested Citation

Minutti-Meza, Miguel and Nanda, Dhananjay and Xu, Rosy, Big Shoes to Fill: CEO Turnover and Pre-Appointment Firm Performance (March 25, 2022). University of Miami Business School Research Paper No. 3668379, Available at SSRN: https://ssrn.com/abstract= or http://dx.doi.org/10.2139/ssrn.3668379

Miguel Minutti-Meza (Contact Author)

University of Miami - Department of Accounting ( email )

Coral Gables, FL 33146-6531
United States
305-284-6287 (Phone)

Dhananjay Nanda

University of Miami - Department of Accounting ( email )

Coral Gables, FL 33146-6531
United States

Rosy Xu

The Chinese University of Hong Kong ( email )

Rm 1003, 10/F, Cheng Yu Tung Building
12 Chak Cheung Street
Shatin, N.T.
Hong Kong

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