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Risk and CEO turnover

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  • Bushman, Robert
  • Dai, Zhonglan
  • Wang, Xue

Abstract

This paper investigates how performance risk impacts a board's ability to learn about the unknown talent of a chief executive officer (CEO). We theorize that the information content of performance is increasing in idiosyncratic risk and decreasing in systematic risk. We provide robust empirical evidence that the likelihood of CEO turnover is increasing in idiosyncratic risk and decreasing in systematic risk and that turnover-performance-sensitivity is also increasing in idiosyncratic risk and decreasing in systematic risk. We further investigate relations between the threat of termination and CEO compensation, showing that for retained CEOs, both subsequent pay-performance-sensitivity and pay levels decrease in the probability of turnover.

Suggested Citation

  • Bushman, Robert & Dai, Zhonglan & Wang, Xue, 2010. "Risk and CEO turnover," Journal of Financial Economics, Elsevier, vol. 96(3), pages 381-398, June.
  • Handle: RePEc:eee:jfinec:v:96:y:2010:i:3:p:381-398
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    References listed on IDEAS

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    Cited by:

    1. Citci, Sadettin Haluk & Inci, Eren, 2016. "The masquerade ball of the CEOs and the mask of excessive risk," Economic Modelling, Elsevier, vol. 58(C), pages 383-393.
    2. repec:eee:corfin:v:48:y:2018:i:c:p:76-93 is not listed on IDEAS
    3. Florian S. Peters & Alexander F. Wagner, 2014. "The Executive Turnover Risk Premium," Journal of Finance, American Finance Association, vol. 69(4), pages 1529-1563, August.
    4. Ying L. Compton & Angela K. Gore & Susan L. Kulp, 2017. "Compensation design and political risk: the case of city managers," Review of Accounting Studies, Springer, vol. 22(1), pages 109-140, March.
    5. Kick, Thomas & Nehring, Inge & Schertler, Andrea, 2017. "Do all new brooms sweep clean? Evidence for outside bank appointments," Journal of Banking & Finance, Elsevier, vol. 84(C), pages 135-151.
    6. repec:eee:corfin:v:48:y:2018:i:c:p:428-441 is not listed on IDEAS
    7. Dai, Lili & Fu, Renhui & Kang, Jun-Koo & Lee, Inmoo, 2016. "Corporate governance and the profitability of insider trading," Journal of Corporate Finance, Elsevier, vol. 40(C), pages 235-253.
    8. Bornemann, Sven & Kick, Thomas & Pfingsten, Andreas & Schertler, Andrea, 2015. "Earnings baths by CEOs during turnovers: empirical evidence from German savings banks," Journal of Banking & Finance, Elsevier, vol. 53(C), pages 188-201.
    9. Kim, Y. Han (Andy), 2013. "Self attribution bias of the CEO: Evidence from CEO interviews on CNBC," Journal of Banking & Finance, Elsevier, vol. 37(7), pages 2472-2489.
    10. repec:eee:jaecon:v:64:y:2017:i:1:p:37-55 is not listed on IDEAS
    11. Fiordelisi, Franco & Ricci, Ornella, 2014. "Corporate culture and CEO turnover," Journal of Corporate Finance, Elsevier, vol. 28(C), pages 66-82.
    12. Ferreira, Daniel & Ginglinger, Edith & Laguna, Marie-Aude & Skalli, Yasmine, 2017. "Board Quotas and Director-Firm Matching," CEPR Discussion Papers 12117, C.E.P.R. Discussion Papers.
    13. Citci, Sadettin Haluk & Inci, Eren, 2016. "Career concerns and Bayesian overconfidence of managers," International Journal of Industrial Organization, Elsevier, vol. 46(C), pages 137-159.
    14. Humphreys, Brad R. & Paul, Rodney J. & Weinbach, Andrew P., 2016. "Performance expectations and the tenure of head coaches: Evidence from NCAA football," Research in Economics, Elsevier, vol. 70(3), pages 482-492.
    15. Liu, Yun, 2014. "Outside options and CEO turnover: The network effect," Journal of Corporate Finance, Elsevier, vol. 28(C), pages 201-217.
    16. Livne, Gilad & Markarian, Garen & Milne, Alistair, 2011. "Bankers' compensation and fair value accounting," Journal of Corporate Finance, Elsevier, vol. 17(4), pages 1096-1115, September.
    17. Piskorski, Tomasz & Westerfield, Mark M., 2016. "Optimal dynamic contracts with moral hazard and costly monitoring," Journal of Economic Theory, Elsevier, vol. 166(C), pages 242-281.
    18. Chen, Changling & Kim, Jeong-Bon & Yao, Li, 2017. "Earnings smoothing: Does it exacerbate or constrain stock price crash risk?," Journal of Corporate Finance, Elsevier, vol. 42(C), pages 36-54.
    19. Ali, Ashiq & Zhang, Weining, 2015. "CEO tenure and earnings management," Journal of Accounting and Economics, Elsevier, vol. 59(1), pages 60-79.
    20. repec:nea:journl:y:2018:i:38:p:76-103 is not listed on IDEAS
    21. Fu, Renhui & Gao, Fang & Kim, Yong H. & Qiu, Buhui, 2017. "Performance volatility, information availability, and disclosure reforms," Journal of Banking & Finance, Elsevier, vol. 75(C), pages 35-52.

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