Do Directorship Returns Affect CEO Turnover?

Abstract

Boards staffed by directors who have experienced high stock returns at other firms where they hold directorships are more likely to fire their CEOs. A one-standard-deviation increase in such directorship returns increases the probability of forced turnover by 11-19%. Directorship returns have a larger impact when they are more recent and when CEO ability is harder or costlier to evaluate, consistent with boards using an availability heuristic to form beliefs about the ability gap between incumbent and replacement CEOs. Conditional on forced turnover, directorship returns are inversely correlated with subsequent improvements in operating performance, suggesting that such beliefs are suboptimal.

Keywords: Board of directors, CEO turnover, heuristics, corporate governance

JEL Classification: G30