DP12274 Performance-induced CEO turnover

Author(s): Dirk Jenter, Katharina A. Lewellen
Publication Date: September 2017
Keyword(s): CEO turnover, CEO-firm matching, corporate governance, turnover-performance relationship
JEL(s): D22, D23, G34, J63, M12, M51
Programme Areas: Labour Economics, Financial Economics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=12274

This paper revisits the relationship between firm performance and CEO turnover. We drop the distinction between forced and voluntary turnovers and introduce the concept of performance-induced turnover, defined as turnover that would not have occurred had performance been "good". We document a close link between performance and CEO turnover and estimate that between 38% and 55% of all turnovers are performance induced, with an even higher percentage early in tenure. This is significantly more than the number of forced turnovers identified in prior studies. We contrast the empirical properties of performance-induced turnovers with the predictions of Bayesian learning models of CEO turnover. Learning by boards about CEO ability appears to be slow, and boards act as if CEO ability (or match quality) was subject to frequent and sizeable shocks.