IDEAS home Printed from https://ideas.repec.org/
MyIDEAS: Login to save this paper

CEO Turnover in a Competitive Assignment Framework

  • Camelia M. Kuhnen

    (Northwestern University)

  • Andrea L. Eisfeldt

    (Northwestern University)

This paper considers the empirical stylized facts about CEO turnover in the context of a competitive assignment model in which CEOs and firms form matches based on multiple characteristics. CEOs are viewed as hedonic goods with multidimensional skill bundles. Likewise, firms' production functions have heterogeneous weights on CEO skills such as firm-specific knowledge, ability to grow sales, and ability to cut costs. There exists a competitive market for CEOs, whose wages are determined analogously to the prices of the hedonic goods in Rosen (1974). The competitive assignment framework with multiple skill dimensions is able to capture several stylized facts which are not explained by existing theories. For example, in our model, both poor relative performance and poor absolute performance are associated with higher rates of CEO turnover. Relative performance evaluation matters even though there is no agency problem or learning, and overall industry performance aspects turnover as well. Our model also makes predictions about the type and pay of the replacement manager conditional on turnover type which are consistent with patterns we document empirically. For example, managers who are fired are more likely to be replaced by industry outsiders than are managers who quit or retire. Moreover, replacement managers in these cases earn significantly more than the incumbent. To document pay and replacement type as a function of the type of turnover event, we construct a large dataset describing turnover events during the period 1992-2006, including the type of turnover event, and the characteristics and pay of the replacement manager.

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.

File URL: https://economicdynamics.org/meetpapers/2010/paper_1081.pdf
Download Restriction: no

Paper provided by Society for Economic Dynamics in its series 2010 Meeting Papers with number 1081.

as
in new window

Length:
Date of creation: 2010
Date of revision:
Handle: RePEc:red:sed010:1081
Contact details of provider: Postal:
Society for Economic Dynamics Marina Azzimonti Department of Economics Stonybrook University 10 Nicolls Road Stonybrook NY 11790 USA

Web page: http://www.EconomicDynamics.org/
Email:


More information through EDIRC

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:

as in new window
  1. Sattinger, Michael, 1979. "Differential Rents and the Distribution of Earnings," Oxford Economic Papers, Oxford University Press, vol. 31(1), pages 60-71, March.
  2. Jason R. Barro & Robert J. Barro, 1990. "Pay, Performance, and Turnover of Bank CEOs," NBER Working Papers 3262, National Bureau of Economic Research, Inc.
  3. Bengt Holmstrom, 1982. "Moral Hazard in Teams," Bell Journal of Economics, The RAND Corporation, vol. 13(2), pages 324-340, Autumn.
  4. Jenter, Dirk & Kanaan, Fadi, 2008. "CEO Turnover and Relative Performance Evaluation," Research Papers 1992, Stanford University, Graduate School of Business.
  5. Peter M. DeMarzo & Michael J. Fishman, 2007. "Agency and Optimal Investment Dynamics," Review of Financial Studies, Society for Financial Studies, vol. 20(1), pages 151-188, January.
  6. Zhiguo He & Neng Wang & Mike Fishman & Peter DeMarzo, 2008. "Dynamic agency and the q theory of investment," 2008 Meeting Papers 1070, Society for Economic Dynamics.
  7. Xavier Gabaix & Augustin Landier, 2006. "Why Has CEO Pay Increased So Much?," 2006 Meeting Papers 518, Society for Economic Dynamics.
  8. Zhiguo He, 2012. "Dynamic Compensation Contracts with Private Savings," Review of Financial Studies, Society for Financial Studies, vol. 25(5), pages 1494-1549.
  9. Mark R. Huson, 2001. "Internal Monitoring Mechanisms and CEO Turnover: A Long-Term Perspective," Journal of Finance, American Finance Association, vol. 56(6), pages 2265-2297, December.
  10. Steven N. Kaplan & Joshua Rauh, 2010. "Wall Street and Main Street: What Contributes to the Rise in the Highest Incomes?," Review of Financial Studies, Society for Financial Studies, vol. 23(3), pages 1004-1050, March.
  11. Robert McDonald & Daniel Siegel, 1986. "The Value of Waiting to Invest," The Quarterly Journal of Economics, Oxford University Press, vol. 101(4), pages 707-727.
  12. Hermalin, Benjamin E. & Weisbach, Michael S., 2009. "Information Disclosure and Corporate Governance," Working Paper Series 2008-17, Ohio State University, Charles A. Dice Center for Research in Financial Economics.
  13. Florian S. PETERS & Alexander F. WAGNER, 2008. "The executive turnover risk premium," Swiss Finance Institute Research Paper Series 08-11, Swiss Finance Institute.
  14. Rosen, Sherwin, 1981. "The Economics of Superstars," American Economic Review, American Economic Association, vol. 71(5), pages 845-58, December.
  15. Lustig, Hanno & Syverson, Chad & Van Nieuwerburgh, Stijn, 2011. "Technological change and the growing inequality in managerial compensation," Journal of Financial Economics, Elsevier, vol. 99(3), pages 601-627, March.
  16. Kevin J. Murphy & Jan Zabojnik, 2006. "Managerial Capital and the Market for CEOs," Working Papers 1110, Queen's University, Department of Economics.
  17. Warner, Jerold B. & Watts, Ross L. & Wruck, Karen H., 1988. "Stock prices and top management changes," Journal of Financial Economics, Elsevier, vol. 20(1-2), pages 461-492, January.
  18. Fahlenbrach, Rudiger & Low, Angie & Stulz, Rene, 2008. "Why Do Firms Appoint CEOs as Outside Directors?," Working Paper Series 2008-10, Ohio State University, Charles A. Dice Center for Research in Financial Economics.
  19. Kevin J. Murphy & Ján Zábojník, 2004. "CEO Pay and Appointments: A Market-Based Explanation for Recent Trends," American Economic Review, American Economic Association, vol. 94(2), pages 192-196, May.
  20. Sattinger, Michael, 1993. "Assignment Models of the Distribution of Earnings," Journal of Economic Literature, American Economic Association, vol. 31(2), pages 831-80, June.
  21. Yuliy Sannikov, 2008. "A Continuous-Time Version of the Principal-Agent Problem," Review of Economic Studies, Oxford University Press, vol. 75(3), pages 957-984.
  22. Rosen, Sherwin, 1974. "Hedonic Prices and Implicit Markets: Product Differentiation in Pure Competition," Journal of Political Economy, University of Chicago Press, vol. 82(1), pages 34-55, Jan.-Feb..
  23. Lazear, Edward P. & Oyer, Paul, 2004. "Internal and external labor markets: a personnel economics approach," Labour Economics, Elsevier, vol. 11(5), pages 527-554, October.
  24. Inderst, Roman & Müller, Holger, 2009. "CEO replacement under private information," IMFS Working Paper Series 29, Goethe University Frankfurt, Institute for Monetary and Financial Stability (IMFS).
  25. Giannetti, Mariassunta, 2007. "Serial CEO Incentives and the Structure of Managerial Contracts," CEPR Discussion Papers 6422, C.E.P.R. Discussion Papers.
  26. Huson, Mark R. & Malatesta, Paul H. & Parrino, Robert, 2004. "Managerial succession and firm performance," Journal of Financial Economics, Elsevier, vol. 74(2), pages 237-275, November.
  27. Eisfeldt, Andrea L. & Rampini, Adriano A., 2008. "Managerial incentives, capital reallocation, and the business cycle," Journal of Financial Economics, Elsevier, vol. 87(1), pages 177-199, January.
  28. Parrino, Robert & Sias, Richard W. & Starks, Laura T., 2003. "Voting with their feet: institutional ownership changes around forced CEO turnover," Journal of Financial Economics, Elsevier, vol. 68(1), pages 3-46, April.
  29. Harford, Jarrad, 2005. "What drives merger waves?," Journal of Financial Economics, Elsevier, vol. 77(3), pages 529-560, September.
  30. Oyer, Paul, 2001. "Why Do Firms Use Incentives That Have No Incentive Effects?," Research Papers 1686, Stanford University, Graduate School of Business.
  31. Peter M. DeMarzo & Michael J. Fishman, 2007. "Optimal Long-Term Financial Contracting," Review of Financial Studies, Society for Financial Studies, vol. 20(6), pages 2079-2128, November.
  32. Marko Tervio, 2008. "The Difference That CEOs Make: An Assignment Model Approach," American Economic Review, American Economic Association, vol. 98(3), pages 642-68, June.
  33. repec:sae:ilrrev:v:43:y:1990:i:3:p:30-51 is not listed on IDEAS
  34. Marianne Bertrand & Antoinette Schoar, 2003. "Managing with Style: The Effect of Managers on Firm Policies," The Quarterly Journal of Economics, Oxford University Press, vol. 118(4), pages 1169-1208.
  35. Robert E. Lucas Jr., 1978. "On the Size Distribution of Business Firms," Bell Journal of Economics, The RAND Corporation, vol. 9(2), pages 508-523, Autumn.
  36. Murphy, Kevin J., 1999. "Executive compensation," Handbook of Labor Economics, in: O. Ashenfelter & D. Card (ed.), Handbook of Labor Economics, edition 1, volume 3, chapter 38, pages 2485-2563 Elsevier.
  37. Kelvin J. Lancaster, 1966. "A New Approach to Consumer Theory," Journal of Political Economy, University of Chicago Press, vol. 74, pages 132.
  38. Steven N. Kaplan & Mark M. Klebanov & Morten Sorensen, 2008. "Which CEO Characteristics and Abilities Matter?," NBER Working Papers 14195, National Bureau of Economic Research, Inc.
  39. Steven N. Kaplan & Bernadette Minton, 2006. "How has CEO Turnover Changed? Increasingly Performance Sensitive Boards and Increasingly Uneasy CEOs," NBER Working Papers 12465, National Bureau of Economic Research, Inc.
  40. Daniel Garrett & Alessandro Pavan, 2010. "Managerial Turnover in a Changing World," Discussion Papers 1490, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  41. Lucian A. Taylor, 2010. "Why Are CEOs Rarely Fired? Evidence from Structural Estimation," Journal of Finance, American Finance Association, vol. 65(6), pages 2051-2087, December.
  42. McLaughlin, Kenneth J, 1991. "A Theory of Quits and Layoffs with Efficient Turnover," Journal of Political Economy, University of Chicago Press, vol. 99(1), pages 1-29, February.
  43. Parrino, Robert, 1997. "CEO turnover and outside succession A cross-sectional analysis," Journal of Financial Economics, Elsevier, vol. 46(2), pages 165-197, November.
  44. Sam Allgood, 2003. "The Match between CEO and Firm," The Journal of Business, University of Chicago Press, vol. 76(2), pages 317-342, April.
Full references (including those not matched with items on IDEAS)

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

When requesting a correction, please mention this item's handle: RePEc:red:sed010:1081. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Christian Zimmermann)

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.

This information is provided to you by IDEAS at the Research Division of the Federal Reserve Bank of St. Louis using RePEc data.