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

Listed author(s):
  • 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)

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.

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File URL: http://dx.doi.org/10.1287/mnsc.2013.1759
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Article provided by INFORMS in its journal Management Science.

Volume (Year): 60 (2014)
Issue (Month): 2 (February)
Pages: 319-337

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Handle: RePEc:inm:ormnsc:v:60:y:2014:i:2:p:319-337
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