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The Executive Turnover Risk Premium

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Author Info

  • Florian S. Peters

    (Duisenberg school of finance, University of Amsterdam)

  • Alexander F. Wagner

    (Swiss Finance Institute, University of Zuerich, CEPR, Harvard University)

Abstract

We establish that CEOs of companies experiencing volatile industry conditions are more likely tobe dismissed. At the same time, industry risk is, controlling for various other factors, unlikelyto be directly associated with CEO compensation other than through dismissal risk. Using thisidentification strategy, we document that CEO turnover risk is significantly positively associatedwith compensation. This finding is important because job-risk compensating wage differentials arisenaturally in competitive labor markets. By contrast, the evidence rejects a simple entrenchmentmodel according to which powerful CEOs have lower job risk and at the same time secure highercompensation.

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File URL: http://papers.tinbergen.nl/12021.pdf
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Bibliographic Info

Paper provided by Tinbergen Institute in its series Tinbergen Institute Discussion Papers with number 12-021/2/DSF30.

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Date of creation: 08 Mar 2012
Date of revision:
Handle: RePEc:dgr:uvatin:20120021

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Web page: http://www.tinbergen.nl

Related research

Keywords: CEO turnover; CEO Compensation; Corporate Governance;

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References

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  1. Paul A. Gompers & Joy L. Ishii & Andrew Metrick, 2001. "Corporate Governance and Equity Prices," NBER Working Papers 8449, National Bureau of Economic Research, Inc.
  2. Yermack, David, 2006. "Golden Handshakes: Separation Pay for Retired and Dismissed CEOs," SIFR Research Report Series 41, Institute for Financial Research.
  3. Joshua Angrist & Alan B. Krueger, 2001. "Instrumental Variables and the Search for Identification: From Supply and Demand to Natural Experiments," NBER Working Papers 8456, National Bureau of Economic Research, Inc.
  4. Dirk Jenter & Fadi Kanaan, 2006. "CEO Turnover and Relative Performance Evaluation," NBER Working Papers 12068, National Bureau of Economic Research, Inc.
  5. Xavier Gabaix & Augustin Landier, 2008. "Why Has CEO Pay Increased So Much?," The Quarterly Journal of Economics, MIT Press, vol. 123(1), pages 49-100, 02.
  6. Fama, Eugene F. & French, Kenneth R., 1997. "Industry costs of equity," Journal of Financial Economics, Elsevier, vol. 43(2), pages 153-193, February.
  7. Alex Edmans & Xavier Gabaix & Augustin Landier, 2009. "A Multiplicative Model of Optimal CEO Incentives in Market Equilibrium," Review of Financial Studies, Society for Financial Studies, vol. 22(12), pages 4881-4917, December.
  8. Benjamin E. Hermalin, 2005. "Trends in Corporate Governance," Journal of Finance, American Finance Association, vol. 60(5), pages 2351-2384, October.
  9. Eisfeldt, Andrea L. & Kuhnen, Camelia M., 2013. "CEO turnover in a competitive assignment framework," Journal of Financial Economics, Elsevier, vol. 109(2), pages 351-372.
  10. Weisbach, Michael S., 1988. "Outside directors and CEO turnover," Journal of Financial Economics, Elsevier, vol. 20(1-2), pages 431-460, January.
  11. Moretti, Enrico, 2000. " Do Wages Compensate for Risk of Unemployment? Parametric and Semiparametric Evidence from Seasonal Jobs," Journal of Risk and Uncertainty, Springer, vol. 20(1), pages 45-66, January.
  12. Stock, James H & Wright, Jonathan H & Yogo, Motohiro, 2002. "A Survey of Weak Instruments and Weak Identification in Generalized Method of Moments," Journal of Business & Economic Statistics, American Statistical Association, vol. 20(4), pages 518-29, October.
  13. Parrino, Robert, 1997. "CEO turnover and outside succession A cross-sectional analysis," Journal of Financial Economics, Elsevier, vol. 46(2), pages 165-197, November.
  14. Kevin J. Murphy & Ján Zábojník, 2004. "CEO Pay and Appointments: A Market-Based Explanation for Recent Trends," American Economic Review, American Economic Association, vol. 94(2), pages 192-196, May.
  15. Eisfeldt, Andrea L. & Rampini, Adriano A., 2008. "Managerial incentives, capital reallocation, and the business cycle," Journal of Financial Economics, Elsevier, vol. 87(1), pages 177-199, January.
  16. Bushman, Robert & Dai, Zhonglan & Wang, Xue, 2010. "Risk and CEO turnover," Journal of Financial Economics, Elsevier, vol. 96(3), pages 381-398, June.
  17. Jonathan E. Ingersoll, Jr., 2006. "The Subjective and Objective Evaluation of Incentive Stock Options," The Journal of Business, University of Chicago Press, vol. 79(2), pages 453-488, March.
  18. Agrawal, Anup & Knoeber, Charles R., 1998. "Managerial compensation and the threat of takeover," Journal of Financial Economics, Elsevier, vol. 47(2), pages 219-239, February.
  19. Fee, C. Edward & Hadlock, Charles J., 2004. "Management turnover across the corporate hierarchy," Journal of Accounting and Economics, Elsevier, vol. 37(1), pages 3-38, February.
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Citations

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Cited by:
  1. Neckermann, Susanne & Cueni, Reto & Frey, Bruno S., 2012. "Awards at work," ZEW Discussion Papers 12-004, ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research.
  2. Susanne Neckermann & Reto Cueni & Bruno S. Frey, 2009. "What is an Award Worth? An Econometric Assessment of the Impact of Awards on Employee Performance," CESifo Working Paper Series 2657, CESifo Group Munich.
  3. Eisfeldt, Andrea L. & Kuhnen, Camelia M., 2013. "CEO turnover in a competitive assignment framework," Journal of Financial Economics, Elsevier, vol. 109(2), pages 351-372.
  4. Alex Edmans & Xavier Gabaix, 2010. "Risk and the CEO Market: Why Do Some Large Firms Hire Highly-Paid, Low-Talent CEOs?," NBER Working Papers 15987, National Bureau of Economic Research, Inc.
  5. Campbell, T. Colin & Gallmeyer, Michael & Johnson, Shane A. & Rutherford, Jessica & Stanley, Brooke W., 2011. "CEO optimism and forced turnover," Journal of Financial Economics, Elsevier, vol. 101(3), pages 695-712, September.

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