CEO Turnover and Relative Performance Evaluation

50 Pages Posted: 10 May 2006  

Dirk Jenter

London School of Economics; National Bureau of Economic Research (NBER); CEPR

Fadi Kanaan

Massachusetts Institute of Technology (MIT) - Sloan School of Management

Multiple version iconThere are 2 versions of this paper

Date Written: March 2006

Abstract

This paper examines whether CEOs are fired after bad firm performance caused by factors beyond their control. Standard economic theory predicts that corporate boards filter out exogenous industry and market shocks to firm performance when deciding on CEO retention. Using a new hand-collected sample of 1,590 CEO turnovers from 1993 to 2001, we document that CEOs are significantly more likely to be dismissed from their jobs after bad industry and bad market performance. A decline in the industry component of firm performance from its 75th to its 25th percentile increases the probability of a forced CEO turnover by approximately 50 percent. This finding is robust to controls for firm-specific performance. The result is at odds with the prior empirical literature which showed that corporate boards filter exogenous shocks from CEO dismissal decisions in samples from the 1970s and 1980s. Our findings suggest that the standard CEO turnover model is too simple to capture the empirical relation between performance and forced CEO turnovers, and we evaluate several extensions to the standard model.

Suggested Citation

Jenter, Dirk and Kanaan, Fadi, CEO Turnover and Relative Performance Evaluation (March 2006). NBER Working Paper No. w12068. Available at SSRN: https://ssrn.com/abstract=888270

Dirk Jenter (Contact Author)

London School of Economics ( email )

Houghton Street
London, WC2A 2AE
United Kingdom

HOME PAGE: http://personal.lse.ac.uk/jenter/

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

CEPR ( email )

77 Bastwick Street
London, EC1V 3PZ
United Kingdom

Fadi Kanaan

Massachusetts Institute of Technology (MIT) - Sloan School of Management ( email )

50 Memorial Drive
Cambridge, MA 02142
United States

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