CEOdismissal: Consequences for the strategic risk taking of competitorCEOs

Abstract

We propose that CEO dismissal can change the strategic decision-making of CEOs at competing firms. Competitor CEOs will experience an increase in job insecurity, which motivates them to refrain from strategic risk taking. We also identify two key boundary conditions that shape the influence of CEO dismissal on competitor CEOs' risk taking. We test our ideas on a sample of CEO dismissals among S&P 1500 firms using a novel synthetic control method approach to matching. We also test the underlying theoretical mechanism using a complementary experiment on top executives. Taken together, these studies advance CEO dismissal research by investigating the spillover effect of CEO dismissal on competitor CEOs' behaviors. Managerial Summary: The position of CEO is more volatile today than ever. When it comes to pulling the trigger on CEO dismissal, companies have increasingly twitchy fingers. Therefore, it seems important to ask: when a company fires their CEO, what happens at all the other companies in the industry? We suggest the CEOs at those companies will start worrying about their job. This fear affects their strategic decision-All authors contributed equally to this study.

Interorganizational Spillover: A Review and a Proposal for Future Research

“…In addition to strategic events, nonstrategic events can alter the perceptions of peer organizations’ managers, change their actions, and generate interorganizational spillover. CEOs of rival firms can reduce their risk taking following the dismissal of the CEO at a focal firm (Connelly et al, 2020). Hedge fund activism, as a nonstrategic event, can prompt effects beyond targeted firms.…”

“…When peer organizations and their stakeholders are unaware of events, interorganizational spillover is unlikely to take place. As noted in our review sections, existing research has investigated a myriad of events that can trigger interorganizational spillover, including industry accidents (Barnett & King, 2008; Diestre & Rajagopalan, 2014), CEO dismissal (Burchard et al, 2020; Connelly et al, 2020), shareholder activism (Reid & Toffel, 2009; Shi et al, 2020), social activism (Briscoe et al, 2015; Fremeth et al, 2021), financial misconduct (Beatty et al, 2013; Paruchuri & Misangyi, 2015), scandals (Nalick et al, 2019; Piazza & Jourdan, 2018), disease outbreak (Paruchuri et al, 2019), protests (Ferguson et al, 2018; Piazza & Perretti, 2020), product recall (Zavyalova et al, 2012), and award events (Fremeth et al, 2021; Reschke, Azoulay, & Stuart, 2018).…”

“…Scholars from different disciplines, including strategy (Chang & Xu, 2008; M.-P. Kang, Mahoney, & Tan, 2009), organization theory (E. Kang, 2008; Kostova & Zaheer, 1999; Zavyalova, Pfarrer, Reger, & Shapiro, 2012), accounting (Lee & Lo, 2016), and finance (Albuquerque, Brandão-Marques, Ferreira, & Matos, 2019; Denis, Jochem, & Rajamani, 2020), have studied the spillover effect of events such as CEO dismissal (Connelly, Li, Shi, & Lee, 2020), financial misconduct (E. Kang, 2008), social activism (Fremeth, Holburn, & Piazza, 2021), and shareholder activism (Gantchev, Gredil, & Jotikasthira, 2019; Shi, Connelly, Hoskisson, & Ketchen, 2020) from a focal organization to its peer organizations and their stakeholders.…”

Chief Executive Officer Dismissal: A Multidisciplinary Integration and Critical Analysis

“…Nor is dismissal well received by investors when it is viewed as premature (proactive or “too soon”), before the CEO has had a chance to enact change (Ertugrul & Krishnan, 2011). Furthermore, Connelly, Li, Shi, and Lee, (2020) found the dismissal of a CEO impacted the risk taking of other CEOs within their industry, demonstrating that the dismissal of one CEO can have ramifications for other firms as well as for the industry as a whole.…”

“…Dismissing the CEO would certainly constitute an impactful event capable of having such spillover effects. In this vein, Connelly et al (2020) recently found that CEO dismissal at one firm induces heightened fears of job insecurity among CEOs at competing firms. Yet, whether the dismissal of a CEO at one firm actually leads to a wave of dismissals at other firms remains to be investigated.…”