Performance-Induced CEO Turnover

Abstract

This paper revisits the relationship between firm performance and CEO turnover. Instead of classifying turnovers into forced and voluntary, we introduce performance-induced turnover, defined as turnover that would not have occurred had performance been “good.” We document a close turnover-performance link and estimate that 38%–55% of turnovers are performance induced. This is significantly more than the number of forced turnovers, though the two types of turnovers are highly correlated. Compared to the predictions of Bayesian learning models, learning about CEO ability appears to be slow, and boards act as if CEO ability (or match quality) was subject to frequent shocks.

Are All Interim CEOs Created Equal? Evidence from Investor Perceptions and CEO Behavior

“…The rate of forced turnovers that I find are higher than those inParrino (1997). However, it is similar to the percentage of CEO turnovers that are "performance-induced" found inJenter and Lewellen (2017) Intintoli, Zhang, and Davidson (2014). use a similar definition to identify forced turnovers.…”

CEO and director compensation, CEO turnover and institutional investors: Is there cronyism in the UK?

“…We then distinguish between forced and voluntary turnover, following the classification of Parrino (1997), frequently used in CEO turnover studies (e.g., Peters and Wagner, 2014;Guo and Masulis, 2015;Jenter and Lewellen, 2010;Jenter and Kanaan, 2015). Specifically, our second indicator, Forced turnover, equals one, if (1) news articles report that the CEO has been fired, forced out, or retires or resigns due to policy differences or pressure; (2) the CEO is under the age of 60 and news articles do not report the reason for the departure as death, poor health, or the acceptance of another comparable position (within the firm or elsewhere); or (3) news articles report that the CEO is retiring but the retirement is not announced at least six months before the succession, and zero otherwise.…”

CEO turnover after poor performance: turnaround or scapegoating?

“…In our study, which focuses on CEO turnover, scapegoating could explain the results found by Jenter and Kanaan (2015) who show that CEOs are more likely to be dismissed following poor performance, even if the bad situation was common to the industry or the market. In a more recent study, Jenter and Lewellen (2010) demonstrate that boards do not apply the logic used in many Bayesian models, which assign equal weight to each performance signal. Rather, they assign a disproportionate amount of weight to recent CEO performance.…”

“…In summary, much of the existing literature suggests that when CEOs are dismissed following poor performance, it is because they are believed to be responsible for the distressed state of the company and it is therefore assumed that their dismissal will make it easier to change course (Salancik and Pfeffer, 1980;Kesner and Dalton, 1994). However, a large body of research studies emphasises that CEOs may be dismissed for poor performance even when the latter is a result of events beyond their control (Pfeffer and Salancik, 1978;Schwartz and Menon, 1985;Leone and Liu, 2010;Jenter and Lewellen, 2010). The rationale behind scapegoating a CEO seems to be that it might restore external stakeholders' confidence in the firm and enhance the firm's image (Schwartz and Menon, 1985).…”

“…However, if the motive behind the turnover is scapegoating, then long-term performance of the firms will not depend on whether they change their CEO. Jenter and Lewellen (2010) show that CEOs are fired even when the poor performance of the firm is a result of factors beyond their control. In this case, the performance of the firm will not necessarily be better than that of the comparable matched firms.…”