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CEO Turnover and Relative Performance Evaluation

  • Jenter, Dirk

    (Stanford U)

  • Kanaan, Fadi

    (Massachusetts Institute of Technology)

This paper examines whether CEOs are fired after bad firm performance caused by factors beyond their control. Standard economic theory predicts that corporate boards filter out exogenous industry and market shocks from firm performance before deciding on CEO retention. Using a new hand-collected sample of 1,627 CEO turnovers from 1993 to 2001, we document that CEOs are significantly more likely to be dismissed from their jobs after bad industry or bad market performance. A decline in the industry component of firm performance from its 75th to its 25th percentile increases the probability of a forced CEO turnover by approximately 50 percent. This result is at odds with the prior empirical literature, which showed that corporate boards filter exogenous shocks from CEO dismissal decisions in samples from the 1970s and 1980s. Our findings suggest that the standard CEO turnover model is too simple to capture the empirical relation between performance and forced CEO turnovers, and we evaluate several extensions to the standard model.

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Paper provided by Stanford University, Graduate School of Business in its series Research Papers with number 1992.

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Date of creation: May 2008
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Handle: RePEc:ecl:stabus:1992
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