Uninformative Performance Signals and Forced CEO Turnover

43 Pages Posted: 16 Aug 2021

See all articles by Raphael Flepp

Raphael Flepp

University of Zurich - Department of Business Administration (IBW)

Date Written: August 12, 2021

Abstract

This paper provides evidence that corporate boards violate the informativeness principle in their forced CEO turnover decisions by failing to ignore uninformative performance outcome signals. I show that CEOs of firms with barely positive shareholder returns in the previous year are less likely to be dismissed than CEOs of firms with barely negative returns, even though this return outcome is conditionally uninformative. I observe a similar pattern for stock returns relative to the S&P 500 index return: a firm's board is less likely to dismiss its CEO if the firm barely outperformed the S&P 500 index than if the firm barely underperformed the S&P 500 index. Moreover, I demonstrate that the tendency of boards to consider uninformative absolute return outcomes has decreased over time, while their tendency to consider uninformative relative return outcomes has increased over time. This suggests that boards have shifted their focus toward relative returns while continuing to violate the informativeness principle.

Keywords: forced CEO turnover, board of directors, informativeness principle, outcome bias, regression discontinuity design

JEL Classification: G30, M51, D23

Suggested Citation

Flepp, Raphael, Uninformative Performance Signals and Forced CEO Turnover (August 12, 2021). Available at SSRN: https://ssrn.com/abstract=3904056 or http://dx.doi.org/10.2139/ssrn.3904056

Raphael Flepp (Contact Author)

University of Zurich - Department of Business Administration (IBW) ( email )

Plattenstrasse 14
Zurich, 8032
Switzerland

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