CEO Turnover and Director Reputation

Abstract

This paper analyzes the reputational effects of forced CEO turnovers on outside directors. Directors interlocked to a forced CEO turnover experience large and persistent increases in withheld votes at subsequent re-elections relative to non-turnover-interlocked directors. Reputational losses are larger for turnovers with a higher potential for disrupting a firm's management, for directors favorably inclined to the CEO, and for directors with a committee-based responsibility for monitoring the CEO. Our results imply that the average forced CEO turnover signals a governance failure at the board level, and that shareholders rely on salient actions to update their beliefs about directors' hidden qualities.

Keywords: CEO turnover, director elections, director reputation, CEO succession, shareholder voting

JEL Classification: G32, G34