Big Shoes to Fill: CEO Turnover and Pre-Appointment Firm Performance

Abstract

Bayesian learning implies that corporate owners' performance expectations for their CEO are affected by their firm's performance prior to the CEO's appointment because firm asset quality is persistent. Accordingly, we find that the sensitivity of CEO turnover to performance increases in pre-appointment firm performance; that is, a CEO is more likely to be dismissed for underperformance when appointed at a better-performing firm. Consistent with Bayesian learning, we show that this effect increases with firm uncertainty and declines over CEO tenure. We find no evidence that the effect is due to owners' biased assessments of CEO ability or corporate governance quality. Collectively, our results suggest that CEOs, indeed, face a "big shoes to fill" effect that affects their performancerelated turnover likelihood.