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Governance and CEO Turnover: Do Something or Do the Right Thing?

Author

Listed:
  • Raymond J. Fisman

    () (Columbia Business School, New York, New York 10027)

  • Rakesh Khurana

    () (Harvard Business School, Boston, Massachusetts 02163)

  • Matthew Rhodes-Kropf

    () (Harvard Business School, Boston, Massachusetts 02163)

  • Soojin Yim

    () (Goizueta Business School, Emory University, Atlanta, Georgia 30322)

Abstract

We study how corporate governance affects firm value through the decision of whether to fire or retain the chief executive officer (CEO). We present a model in which weak governance---which prevents shareholders from controlling the board---protects inferior CEOs from dismissal, while at the same time insulates the board from pressures by biased or uninformed shareholders. Whether stronger governance improves retain/replace decisions depends on which of these effects dominates. We use our theoretical framework to assess the effect of governance on the quality of firing and hiring decisions using data on the CEO dismissals of large U.S. corporations during 1994--2007. Our findings are most consistent with a beneficent effect of weak governance on CEO dismissal decisions, suggesting that insulation from shareholder pressure may allow for better long-term decision making. This paper was accepted by Brad Barber, finance.

Suggested Citation

  • Raymond J. Fisman & Rakesh Khurana & Matthew Rhodes-Kropf & Soojin Yim, 2014. "Governance and CEO Turnover: Do Something or Do the Right Thing?," Management Science, INFORMS, vol. 60(2), pages 319-337, February.
  • Handle: RePEc:inm:ormnsc:v:60:y:2014:i:2:p:319-337
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    File URL: http://dx.doi.org/10.1287/mnsc.2013.1759
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    References listed on IDEAS

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    Citations

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    Cited by:

    1. Dirk Jenter & Fadi Kanaan, 2015. "CEO Turnover and Relative Performance Evaluation," Journal of Finance, American Finance Association, vol. 70(5), pages 2155-2184, October.
    2. repec:eee:jaecon:v:64:y:2017:i:1:p:37-55 is not listed on IDEAS
    3. Correa, Ricardo & Lel, Ugur, 2016. "Say on pay laws, executive compensation, pay slice, and firm valuation around the world," Journal of Financial Economics, Elsevier, vol. 122(3), pages 500-520.
    4. Duflo, Esther & Dupas, Pascaline & Kremer, Michael, 2015. "School governance, teacher incentives, and pupil–teacher ratios: Experimental evidence from Kenyan primary schools," Journal of Public Economics, Elsevier, vol. 123(C), pages 92-110.
    5. Bang Dang Nguyen, 2015. "Is More News Good News? Media Coverage of CEOs, Firm Value, and Rent Extraction," Quarterly Journal of Finance (QJF), World Scientific Publishing Co. Pte. Ltd., vol. 5(04), pages 1-38, December.

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