Struck by Luck: Noisy Capability Cues and CEO Dismissal

52 Pages Posted: 16 Aug 2021 Last revised: 16 Jan 2024

See all articles by Raphael Flepp

Raphael Flepp

University of Zurich - Department of Business Administration (IBW)

Pascal Flurin Meier

University of Zurich - Department of Business Administration (IBW)

Date Written: January 15, 2024

Abstract

A board’s key decision to dismiss or retain a current CEO is associated with complexity and uncertainty because CEO ability is not directly observable. Instead, boards must rely on capability cues when evaluating the ability of the CEO. However, capability cues are frequently noisy, encompassing both informative cues about CEO ability and luck factors from which nothing about the ability of the CEO can be inferred. Expanding on the behavioral theory of boards, we theorize that boards fail to perfectly distinguish between informative cues and luck factors and misattribute luck factors to CEO ability. Thus, we conjecture that boards are less likely to dismiss CEOs when capability cues appear more favorable due to luck factors. Using cognitive abilities and the decision context as contingency factors, we further argue that this effect is attenuated by director experience but accentuated by pressure from misinformed institutional investors. Exploiting a regression discontinuity design to test for causal impacts of luck factors, our results support our hypotheses.

Keywords: CEO dismissal; Behavioral corporate governance; Noisy capability cues; Luck

Suggested Citation

Flepp, Raphael and Meier, Pascal Flurin, Struck by Luck: Noisy Capability Cues and CEO Dismissal (January 15, 2024). 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

Pascal Flurin Meier

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

Plattenstrasse 14
Zurich, 8032
Switzerland

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