CEO turnover in large banks: Does tail risk matter?

Abstract

Using a unique international dataset, we show that the CEOs of large banks exhibit an increased probability of forced turnover when their organizations are more exposed to idiosyncratic tail risks. The importance of idiosyncratic tail risk in CEO dismissals is strengthened when there is more competition in the banking industry and when stakeholders have more to lose in the case of distress. Overall, we document that the exposure to idiosyncratic tail risk offers valuable signals to bank boards on the quality of the choices made by CEOs and these signals are different from those provided by accounting and market measures of bank performance and by idiosyncratic volatility. In contrast, systematic tail risk is usually filtered out from the firing decision, only becoming important for forced CEO turnovers in the presence of a major variation in the costs that the exposure to this risk generates for shareholders and the organization.  We thank John Core (the editor) and Robert Bushman (the reviewer) for their many insightful comments and suggestions.

Drivers of Global Banking Stability in Times of Crisis: The Role of Corporate Social Responsibility

“…Subject to the availability of ES data for international banking, our sample ultimately included 244 banks from 52 countries, comprising 2481 bank‐year observations in total. The COVID‐19 pandemic period is defined as 2020 (Elnahass, Trinh and Li, 2021) and the global financial crisis as 2007−2009 (Srivastav et al ., 2017). Appendix A shows a detailed list of countries and the corresponding number of banks in our final sample.…”

Shareholder litigation and bank risk

“…Departing from the extant literature on litigation risks and UD laws, we focus on banks' tail risk exposure, which is commonly used in bank financial risk management because it leads to considerable losses and financial distress. As pointed out by Srivastav et al (2017), tail risk offers an important signal of the quality of the choices made by management, which is mainly imputable to a lack of ability or effort. This will help us determine whether the implementation of UD laws and the consequent reduction of shareholder rights might affect a firm's risk management.…”

Bankers on the Board and CEO Turnover

“…They focus more on controlling risks and try to avoid situations where they may face higher levels of risk (Mitchell, 2015;Kang and Kim, 2017;Kang et al, 2019). This is because an increase in a bank's tail risk imposes more hardship and costs on its operation (Stulz, 2015;Srivastav et al, 2017). Thus, a banker's sensitivity to firm risk even as a board member may be a natural response.…”