An Empirical Investigation on CEO Turnover in IT Firms and Firm Performance

Abstract

ABSTRACT Drawn upon upper echelon theory and organizational theory, this research proposes to examine the impact of CEO turnover in IT firms on firm performance in terms of both sustainable accounting performance and market performance. We find that CEO turnover is a significant determinant of firm performance, especially in IT firms. This paper contributes to the IS literature by investigating the CEO turnover impact in IT firms compared to other industries. This study also has practical implications by providing the guideline for IT firms on the CEO turnover policy. Such firms should place additional emphasis on their succession planning efforts. Keywords: Information technology, CEO turnover, Firm performance, IT business value INTRODUCTION Upper Echelon theory has identified the role of senior executives such as the CEO to be pivotal in the successful operation of organizations, and indicated that senior management teams are significant determinants of firm performance. Executives' managerial knowledge, skills, experiences, values, and personalities greatly impact their interpretations of the situations and facilitate formulation of appropriate strategic alternatives (Carpenter, 2004; Hambrick & Mason, 1984). Hannan and Freeman (1984) found evidence that the organizational change, including leadership turnover, is disruptive rather than adaptive. The introduction of new senior executives including the CEO is more likely to disrupt organizational routines and relationships, which result in decreasing in firm performance (Boyne et al., 2011; Hannan & Freeman, 1984). The relationship between executive turnover and firm performance remains one of the most interesting problems for organizations. Prior research has extensively examined the relationship (Adams & Mansi, 2009; Boyne et al., 2011; Hamori & Koyuncu, 2015; He et al., 2011; Huson et al., 2004; Lin et al., 2008; Shen & Cannella, 2002). Results have had mixed findings. Some suggested a positive relationship; some claimed a negative relationship; while others found that there is no association between CEO turnover and firm performance. Furthermore, little research has been done on the impact of CEO turnover on firm performance on distinctive industries or areas. For example, He et al. (2011) examined the impact in the property-liability insurance industry, and found that such firms with a CEO turnover experience more favorable performance changes. Kacmar et al. (2006) studied the impact in fast food, and found that CEO turnover is related to a reduction in firm performance. Likewise, the effect of CEO turnover in IT specific firms on firm performance remains under-researched. IT firms play an important role in today's environment. They are focused on technological activities and have developed innovative products, services, and processes. IT firms have specific characteristics that make them distinct from non-IT firms, for example, the fast pace of technological change and their low cost of entry (Banker et al., 2009). As such, the CEO is an important character for these organizations. Their responsibilities include making timely strategic decisions in response to both changes in technology as well as changes in the market. Therefore we believe that these firms are more likely to experience negative impacts when there is CEO turnover, motivating our desire to study the impact of CEO turnover in IT firms. The research of the impact of CEO turnover in IT firms on firm performance is limited. To fill this research gap and gain a deeper understanding of CEO turnover impact on firm performance, especially in IT firms, we intend to address the following research question: how is CEO turnover in IT firms related to firm performance. To answer this question, we draw upon the prior literature that examines the relationship between CEO turnover and firm performance to develop our research model. …