Asymmetric Information and the Dismissal of Newly Appointed Leaders

Abstract

Newly appointed leaders need time to learn about their organizations and imprint their ideas. Paradoxically, average tenure rates for leaders have fallen dramatically, well below the levels that are required for leaders to be successful. In this paper, we follow Zhang’s (2008) lead to exploring how asymmetric information between the owner (principal) and leader (agent) shapes leader tenure. We contribute to the literature by developing a model of asymmetric information and leader tenure which extends Zhang’s (2008) work on adverse selection, and heeds Zhang’s call to explore the link between moral hazard and leader tenure. We validate our model, using duration analysis, on a sample of 132 newly appointed leaders in the English premier league (1996-2010). From our analysis we are able to draw the following conclusions. First, relating to adverse selection, we found that the number of disruptions, measured as the number of recent dismissals before appointment, have an inverted U-shaped relationship with the hazard of dismissal of the newly appointed leader. In addition, we find that newly appointed inside successions have a greater hazard of dismissal than newly appointed outside successions. Second, relating to moral hazard, we found that the presence of a split-leadership function leads to a greater hazard of dismissal; and that higher levels of the leader-specific investments lowers the hazard of dismissal of newly appointed leaders.