CEO Tenure, Performance and Turnover in S&P 500 Companies

45 Pages Posted: 22 Aug 2006 Last revised: 3 Jun 2010

John C. Coates, IV

Harvard Law School

Reinier Kraakman

Harvard Law School; European Corporate Governance Institute

Date Written: May 2, 2010

Abstract

The centrality of the CEO is reflected in the empirical literature linking CEO turnover to poor firm performance. However, less is known about the institutional and personal correlates of CEO turnover. In this study, we find two CEO characteristics interact with turnover: tenure and ownership. We interpret our results as indicating that CEOs of S&P 500 firms divide into two groups with different tenure patterns – “owners” (who have large personal shareholdings) and “managers” (who have smaller holdings). The tenure of manager-CEOs (as opposed to owner-CEOs) exhibits a term structure loosely similar to the one produced by the tenure process at academic institutions. Turnover significantly depends on firm performance during a CEO’s first four years on the job. In particular, external turnover by sale of the firm peaks a year 4 during a CEO tenure. By contrast, external turnover peaks at years 5 – 6, and plateaus at relatively high levels until year 9 of tenure. These term effects are strongest for relatively young CEOs. We also find that forced exit, retirement, and deals covary rather than substitute for one another as modes of CEO turnover. However, forced exits and deals both relate to poor performance by the firm on different metrics. Our evidence suggests that most internal turnover, particularly after a CEO’s first five years, is unrelated to firm performance.

Keywords: CEO tenure, CEO turnover, acquisitions, retirement, CEO shareholdings, S&P 500 companies

JEL Classification: K22, M12, M51

Suggested Citation

Coates, IV, John C. and Kraakman, Reinier, CEO Tenure, Performance and Turnover in S&P 500 Companies (May 2, 2010). ECGI - Finance Working Paper No. 191/2007; Harvard Law and Economics Discussion Paper No. 595. Available at SSRN: https://ssrn.com/abstract=925532 or http://dx.doi.org/10.2139/ssrn.925532

John C. Coates (Contact Author)

Harvard Law School ( email )

1575 Massachusetts
Hauser 406
Cambridge, MA 02138
United States

Reinier H. Kraakman

Harvard Law School ( email )

1575 Massachusetts
Hauser 406
Cambridge, MA 02138
United States
617-496-3586 (Phone)
617-496-6118 (Fax)

European Corporate Governance Institute ( email )

c/o ECARES ULB CP 114
B-1050 Brussels
Belgium

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