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Does excess employment affect the relative performance evaluation usage in CEO turnover?Evidence from Chinese listed firms

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  • Xinyi CAO
  • Norio SAWABE

Abstract

This study investigates the application of Relative Performance Evaluation (RPE) theory on forced CEO turnover decisions in the context of Chinese listed firms. Using CEO dismissal data spanning from 2009 to 2019, we observe a negative correlation between industry peer performance and the likelihood of forced CEO turnover, which contradicts the assumption of RPE theory. Furthermore, we emphasize the significance of considering Non-Financial Performance Measures (NFPMs) in CEO turnover research. Our research reveals that the extent of excess employment is negatively associated with the probability of forced CEO dismissal, and it also affects how a firm responds to peer performance. Specifically, when firms exhibit high social performance, proxied by excess employment, they tend not to lay off more CEOs due to industry downturns. This study offers a potential explanation for Jenter and Kanaan (2015)’s puzzle of why firms terminate more CEOs when their industry experiences a recession. We argue that prior literature, which predominantly focuses on the relationship between financial performance and CEO turnover, may be incomplete. It is imperative to also account for the impact of NFPMs.

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  • Xinyi CAO & Norio SAWABE, 2023. "Does excess employment affect the relative performance evaluation usage in CEO turnover?Evidence from Chinese listed firms," Discussion papers e-23-006, Graduate School of Economics , Kyoto University.
    • Handle: RePEc:kue:epaper:e-23-006
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    References listed on IDEAS

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    1. Mark R. Huson & Robert Parrino & Laura T. Starks, 2001. "Internal Monitoring Mechanisms and CEO Turnover: A Long‐Term Perspective," Journal of Finance, American Finance Association, vol. 56(6), pages 2265-2297, December.
    2. 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.
    3. Weisbach, Michael S., 1988. "Outside directors and CEO turnover," Journal of Financial Economics, Elsevier, vol. 20(1-2), pages 431-460, January.
    4. Bengt Holmstrom, 1982. "Moral Hazard in Teams," Bell Journal of Economics, The RAND Corporation, vol. 13(2), pages 324-340, Autumn.
    5. Bengt Holmstrom, 1979. "Moral Hazard and Observability," Bell Journal of Economics, The RAND Corporation, vol. 10(1), pages 74-91, Spring.
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    JEL classification:

    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • M21 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Business Economics - - - Business Economics
    • M41 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Accounting

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