CEO turnover: The effect of CEOs' outside options

40 Pages Posted: 12 Oct 2021 Last revised: 14 Dec 2023

See all articles by Tom Stannard

Tom Stannard

University of Otago

Graeme Guthrie

affiliation not provided to SSRN

Date Written: December 11, 2023

Abstract

This paper presents a new model of CEO turnover that includes outside employment and retirement options. The board and the CEO use firm performance to update their beliefs about the CEO's ability. If the CEO's perceived ability falls below an endogenously determined threshold, the board fires the CEO, but if it climbs above a different endogenously determined threshold, the CEO resigns. In situations where CEOs' outside options are more valuable, a good replacement CEO is more likely to pursue outside opportunities, which makes a board less likely to replace its current CEO following poor performance. Our empirical analysis finds that turnover--performance sensitivity is negative for bad performance and typically insignificant for good performance. However, in situations where CEOs have more valuable outside options, turnover--performance sensitivity is positive for good performance, consistent with our theory.

Keywords: CEO turnover, corporate governance, corporate decision-making, learning

JEL Classification: G30, G34, M12

Suggested Citation

Stannard, Tom and Guthrie, Graeme, CEO turnover: The effect of CEOs' outside options (December 11, 2023). Available at SSRN: https://ssrn.com/abstract=3940923 or http://dx.doi.org/10.2139/ssrn.3940923

Tom Stannard (Contact Author)

University of Otago ( email )

P.O. Box 56
Dunedin, Otago 9010
New Zealand

Graeme Guthrie

affiliation not provided to SSRN

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