CEO Departures Research Articles

A Double-Edged Sword: Restructuring as Impression Management and the Risk of Early CEO Departure

A Double-Edged Sword: Restructuring as Impression Management and the Risk of Early CEO Departure

Factors associated with health CEO turnover - a scoping review

BackgroundChief Executive Officer’s (CEO) are integral leaders of health care organisation. Over the last two decades in United States (US) hospitals, it has been noted that CEO turnover rates are increasing, and it was reported that the CEO turnover rates have augmented from 14% in 2008 to 18% in 2017 in the private sector. In Australia, it was discovered that during two years, 41 executives had 18 distinct positions. It has been highlighted that the increasing CEO turnover is a major issue for Australian and international health care organisations. Some of the negative consequences of CEO turnover include organisational instability, high financial costs, loss of human capital and adverse effects on staff morale and patient care.ObjectiveOur scoping review aimed to map and summarise the evidence associated with CEO turnovers in both health and non-health setting, and answer the following questions: 1. What are the reasons for CEO departure?, 2. What are the strategies to minimise CEO turnover?ResultsA protocol explaining the objectives, inclusion criteria and methods for this scoping review were specified in advance and published. This scoping review included 17 studies (13 health and 4 non-health setting) published over a 31-year period that investigated and described the increasing CEO turnover rates. All 17 studies identified causes of CEO turnover along with certain studies identifying facilitators of CEO retention. We classified CEO’s departure reasons into three major themes: organizational, performance, and personal. Organisational factors include CEO departures due to issues within the organisation, performance factors include issues with CEO’s work and personal factors captures personal reasons for CEO’s leaving their job.ConclusionCEOs are under immense pressure to deliver good results and drive growth while satisfying the interests of internal and external stakeholders. There are various reasons for CEO’s departure however the most common factor identified is organisational.

Incentive pay sensitivity to firm performance prior to anticipated CEO turnover

This study explores whether the sensitivity of CEO compensation to changes in firm performance depends on the CEO's likelihood of leaving the position. In a sample of 3180 US publicly-traded firms, we find that the sensitivity of bonus pay to firm performance is enhanced for a CEO who has reached retirement age. Further, we find that the sensitivity of bonus pay to firm performance is greater when there is evidence of a planned CEO turnover within a two-year window. We show that these findings are consistent with a principal-agent model in which firms who anticipate a greater likelihood of CEO departure find it advantageous to enhance the link between bonus pay and concurrent performance measures to compensate for the lowering of incentives that rely on the manager being employed long-term. The results provide a rationale for including bonus pay in the overall executive compensation package.

Dynamic changes in corporate financialization during CEO tenure

We examine the relationship between CEO tenure and corporate financialization using data of non-financial listed companies in Chinese A-share market from 2010 to 2021. We find that corporate financialization is weakened in the early stage of CEO tenure and strengthened in the late stage. Depending on the predictability of CEO's departure time, we classify departures as normal and abnormal. Only under normal departures do CEOs increase corporate financialization in their late tenure. We also find that CEOs of non-state-owned enterprises, older CEOs, and CEOs with lower shareholding ratio increase corporate financialization more in their late tenure.

Empire-Building or Bridge-Building: Value-Destroying Implications of Preemptive CEO Departure

The agency theory predominately assumes that CEOs are likely to entrench themselves unless a force acts to remove or recruit them. Building on this assumption, substantial studies emphasize the board’s effectiveness in assessing leadership efficacy and removing incompetent or self-serving CEOs to eliminate agency costs. We theorize that CEO career concerns make anticipated board intervention a possible source of agency cost. From CEOs’ perspective, they can preemptively time their exists from the current position if they believe employment termination is unavoidable. In this way, CEOs actively manage their career path and leverage their current positions for better career opportunities. Therefore, possible board intervention may give rise to more preemptive voluntary CEO departures, which disrupt organizational routine and impose managerial talent loss. We empirically examine the value-destroying implications of preemptive CEO departure conditional on the elevated likelihood of board intervention. Main findings suggest that peer CEO dismissals and volatile industry conditions can lead to preemptive voluntary CEO departures. These preemptive departures diminish the firm value. This paper proposes a new form of agency costs due to CEOs’ bridge-building rather than empire-building practices.

ESCALATION OF COMMITMENT AND CEO DEPARTURES: THEORY AND EVIDENCE

The escalation of commitment process involves a decision-maker continuing commitment to an investment after receiving negative information. This study develops a principal-agent model to explore how escalation decisions are linked with departures of CEOs from the position. With asymmetric information, a CEO has an incentive to conceal prior decision errors by escalating commitment to failing investments and leaving the firm before the outcome of investment decisions is disclosed publicly. Results of empirical analysis based on a sample of over 3,000 US firms are consistent with the theory and demonstrate that firms’ reporting of low financial performance relative to their industry as well as initiation of new discontinued operations are preceded, and not followed, by unplanned CEO departures.

MONEY VERSUS LEGACY: PRE-SUCCESSION BEHAVIOR OF VOLUNTARILY DEPARTING CEOs

Do CEOs who leave voluntarily influence firm performance before their departure to boost their own wealth or do they care more about their legacy? We address this research question by examining whether voluntarily departing CEOs—defined as CEOs who terminate their tenure without facing significant pressure to do so—make decisions in the pre-succession phase to boost firm performance. In this study, we focus on voluntary departure because the pre-succession phase of this departure type is uniquely characterized by pronounced information asymmetry and considerations of future career prospects of the CEO. Building on the premises of agency theory and on cognition-based explanations of executive decision-making we distinguish between two types of self-interested behavior: CEO personal wealth interests and CEO legacy interests. Our analyses of hand-collected data for voluntary CEO departures in S&P 500 firms between 2000 and 2016 reveal that voluntarily departing CEOs do not actively engage in self-interested decisions in the pre-succession phase. However, throughout their tenures, these CEOs do make accounting-based decisions that are likely to serve their interests in the post-departure phase. With this study, we aim to spur research devoted to voluntary CEO departures and their implications for organizations. These findings have important theoretical and practical implications for corporate governance research and agency theory and what the most appropriate mechanisms of monitoring and control might be on the behavior of voluntarily departing CEOs.

Omitted Agency costs in Preemptive Voluntary CEO Departures

Much like the Newton’s first law of physics, the first law of the agency theory is to assume that CEOs are likely to entrench themselves unless a force acts to remove or recruit them. Given that the principal-agent relationship generates conflicts of interest between the CEOs and the shareholders, corporate governance focuses on balancing retention and termination and the boards of directors (BODs) time their actions and inactions. This paper theorizes that the CEOs are not necessarily waiting for the BODs to make a move. Increased likelihood of preemptive voluntary departures is a potentially value-destroying implication of BODs with a history of CEO dismissals. Furthermore, we argue that CEOs actively manage their careers and time their exits from their current firms based on their own relative (compared to other CEOs) past performance, firm’s relative current performance, their expectations about the BODs likelihood of terminating their employment, CEO-labor market conditions, the riskiness of the stability in firm and industry performances. To this end, we empirically predict the likelihood of CEO preemptive voluntary departure and its value-destroying implications for firms. Main findings suggest that the BODs with a history of executive dismissals increase the likelihood of preemptive voluntary CEO departures. These departures decrease firm value due to unrealized CEO career performance.

CEO turnover, leadership vacuum, and stock market reactions

ABSTRACT CEO departures with a delay in successor appointment create a leadership vacuum inducing operational disruption and strategic uncertainty. Such departures also produce turnaround benefits from cutting ties with a poorly performing CEO and by allowing additional time to search for a qualified successor. Prior studies fail to disentangle these perceived costs and benefits associated with CEO dismissal. After filtering out the turnaround benefits, we find that the market reacts incrementally negatively to CEO departure announcements with a delay in successor appointment than those without such delay, capturing incremental switching costs caused by a leadership vacuum. We also find that the leadership vacuum cost is larger in a more volatile environment or with abandonment of a relay succession plan. Our findings contribute to CEO turnover literature by suggesting that a temporary leadership vacuum is an indicator of abandonment of a succession plan that has been influenced by a poorly performing CEO and that such abandonment creates an opportunity to achieve performance turnaround through a better successor.

A database of CEO turnover and dismissal in S&P 1500 firms, 2000–2018

AbstractResearch SummaryWe introduce an open‐source dataset documenting the reasons for CEO departure in S&P 1500 firms from 2000 through 2018. In our dataset, we code for various forms of voluntary and involuntary departure. We compare our dataset to three published datasets in the CEO succession literature to assess both the qualitative and quantitative differences among them and to explore how these differences impact empirical findings associated with the performance‐CEO dismissal relationship. The dataset includes eight different classifications for CEO turnover, a narrative description of each departure event, and links to sources used in constructing the narrative so that future researchers can validate or adapt the coding. The resulting data are available at (https://doi.org/10.5281/zenodo.4543893).Managerial SummaryThis article describes the development of an open‐source database of all CEO dismissals and departures in the S&P 1500 between 2000 and 2018. Prior research on CEO turnover either does not capture the cause of departure or has coded the event independently, leading to inconsistencies and a lack of transparency in coding schemes. This has made it difficult to generate knowledge on the causes and consequences of CEO dismissal. We describe how we developed the database, and we explore how our dataset compares to prior CEO dismissal research. The resulting data are available at (https://doi.org/10.5281/zenodo.4543893).

Remotely Productive: The Economics of Long-Distance CEOs

We study the efficacy of remote working arrangements between CEOs and firms. Long-distance CEOs underperform according to operating performance, firm valuation, insider reviews, and announcement returns to CEO departures. These effects are stronger when the CEO lives further away and crosses multiple time zones. Using the private costs from uprooting the CEO’s spouse as an instrument for the CEO’s decision to work remotely, we verify the robustness of performance outcomes. The underperformance of long-distance CEOs is related to short-termism, loss of information, and consumption of leisure, such as recreational boats and beach homes.

CEO Turnover and Equity Volatility

Purpose of the paper: This study aims to investigate changes in equity volatility around CEO turnovers. It proposes hypotheses regarding the impact of CEO performance and types of turnover on the changes in equity volatility. It extends the current understanding of the existing theories by providing new empirical evidence. Design/methodology/approach: This paper uses both event study and regression analysis to examine and test the hypotheses proposed empirically. Data are obtained from multiple databases. Findings: This study finds evidence that the relationship between changes in equity volatility and the likelihood of CEO turnovers does not monotonically increase, but is a function of the various types of turnovers and successions. Compared to the departure of outperforming CEOs, the change in equity volatility following the departure of underperforming CEOs is much greater. The positive relationship between the change in volatility and past underperformance is stronger for forced turnovers than for voluntary turnovers. Equity volatility is substantially lower when the CEO relinquishing the post remains as an executive chairman, especially for those successions involving outside appointments. Originality/value: This paper extends the strategy and ability hypothesis by investigating the behaviour of equity volatility around CEO departures in case of prior under or outperformance along with the forced or voluntary nature of the turnover and provide new empirical evidence on the theories.

The performance of acquisitions of founder CEO firms: The effect of founder firm premium

AbstractResearch SummaryWe study the market performance of acquirers of targets that are public founder CEO firms. Using a switching regression model, we first estimate the unique value embedded in these targets due to founder presence, which we term “Founder Firm Premium.” We find Founder Firm Premium was positively associated with founder CEO departure ex‐post, and was negatively associated with acquirer abnormal returns. Our results suggest that the while acquirers pay for founder human capital upfront, they may not necessarily appropriate the associated value ex‐post, and that this uncertainty significantly influences acquisition performance. Additionally we illustrate the tradeoffs involved in founder CEO acquisitions, while drawing attention to the need for differentiating between professional and entrepreneurial human capital in acquisitions.Managerial SummaryWhat risks do acquirers face when buying targets that are founder CEO firms? Founder CEO firms provide access to the human capital of founders and the distinctive organizations these individuals have built over time. However, founder CEOs are also difficult to retain, making it challenging for acquirers to capture the unique value and the associated premium embedded in these firms. We show that founder retention risks play a central role and can result in investors discounting these acquisitions. However, we also find that the non‐founder resources these firms possess in various functional areas can be an important source of value creation in these transactions. Acquirers thus need to be aware of these tradeoffs, while integrating founder CEO firms differently from professional CEO firms.

CEO Turnover in the Wake of Perceived Likelihood of Intervention By The Board Of Directors

The central puzzle surrounding the sensitivity between firm performance and CEO turnover lies in the presumable efficiency of the boards of directors to monitor the CEOs’ decision making, to determine the CEOs’ performance and compensation, and to retain or to fire the CEOs. Further scholarly work examines other exogenous factors (i.e., external shocks) or observable structural and individual characteristics that undermine the judgment and decision-making of the boards. However, these extant studies inevitably overlook the CEOs’ anticipation and possible preemptions facing the boards intervention by resigning as part of the decision-making process in managing their career concerns. Invoking the settling-up concept of Fama (1980), this paper provides a comprehensive examination of the role of unobservable cognitive decision-making factors that account for performance-induced CEO turnovers using a sample of publicly traded U.S. firms throughout 2004 to 2018. We find a U-shaped performance-induced CEO turnover, such that there are more CEO departures at the top or bottom performance deciles versus moderate firm performance. Our evidence is consistent with the concept of “settling up,” that is, given the higher risk of within-tenure compensation or ex-post career opportunity losses, CEO turnover is less likely to be induced by firm performance. Instead, prior CEO departures proxy the level of board intervention and distort the CEO’s decision-making to encourage departure when it might not be warranted. We conclude that given that replacing CEO is costly, increased probability of departure can be a neglected form of agency cost that is driven by increased board intervention. Our investigation of this new sample allows us to more fully understand CEO incentives to stay or to leave stemming from the anticipated risk of board intervention.

Mission Accomplished? An Aspirations-Based Theory of Voluntary CEO Departure

Prior research on CEO succession has often focused on involuntary CEO departure (dismissal). Our study emphasizes an important but under-researched phenomenon, namely voluntary CEO departure. Voluntary departure is defined as the CEO’s decision to terminate his or her tenure, without significant pressure from other stakeholders or institutional processes. Drawing upon self-determination theory, we develop and test a theoretical model to explain why and when some CEOs voluntarily leave their positions when they are under little pressure to do so. Our core premise is that the motivation behind voluntary CEO exit is shaped by CEO aspirations. We distinguish between backward-looking and forward-looking aspirations and analyze how each influences the likelihood of voluntary CEO departure. Further, we develop theoretical arguments to explain how two important situational factors – the presence of a successor and CEO career stage – moderate the CEO aspiration => voluntary CEO exit relationship. Using a sample comprised of the S&P 500 from 2000 to 2016 we find empirical support for our hypotheses. Our study contributes to scholarship at the nexus of CEO succession, aspirations, organizational identification, and self-determination literatures.

CEO Departure and Stock Price Crashes: The Effects of Crepuscular Behavior

This study investigates CEOs’ opportunistic activities in the years prior to their departures. The findings show that the occurrence of a stock price crash is heightened prior to the departure of the CEO. Particularly, one and two years before the CEO departure, firms experience 24.5% and 23.9% more stock price crashes than the rest years of CEO tenure. We ascribe this phenomenon to a “crepuscular behavior”, whereby CEOs in their final years in office appear to act opportunistically by overly hiding negative news from investors. This behavior has certain wealth effects because, for instance, departing CEOs appear to significantly reduce their options and stock ownership, in comparison with their non-departing peers. Finally, this study investigates the corporate governance environment implications surrounding CEO departures.

Do CEOs Affect Employees’ Political Choices?

Abstract We study the relation between CEO and employee campaign contributions and find that CEO-supported political candidates receive 3 times more money from employees than candidates not supported by the CEO. This relation holds around CEO departures, including plausibly exogenous departures due to retirement or death. Equity returns are significantly higher when CEO-supported candidates win elections than when employee-supported candidates win, suggesting that CEOs’ campaign contributions are more aligned with the interests of shareholders than are employee contributions. Finally, employees whose donations are misaligned with their CEOs’ political preferences are more likely to leave their employer. (JEL G30, G38, D72, P48) Authors have furnished an Internet Appendix and Data Supplement, which is available on the Oxford University Press Web site next to the link to the final published paper online.

Overconfidence and Corporate Tax Policy

Using a sample of firms experiencing exogenous CEO departures, we investigate whether firms with overconfident CEOs avoid more tax. We find robust evidence of a positive relation between proxies for corporate tax avoidance and CEO overconfidence. Because our empirical tests use a panel of firm-years with exogenous CEO departures and include controls for stationary firm effects as well as observable firm characteristics, we can better isolate the role of an idiosyncratic personality trait (i.e., overconfidence) on corporate tax outcomes, thus adding to the literatures on overconfidence, managerial effects, and tax avoidance.

CEO Turnover, Information Uncertainty, and Debt Contracting

CEO turnovers are important corporate events that can lead to significant changes within the firm. We find that CEO departures are associated with a subsequent increase in bank loan financing. The negative effect that CEO departures have on borrowing costs is largely driven by forced CEO turnovers. Following such departures, firms pay higher loan spreads, see an increase in covenants, and are more likely to be subject to collateral requirements, when compared to matched non-turnover and voluntary turnover firms. Evidence suggests that asset substitution and changes in accounting information quality help to explain the observed worsened terms following forced dismissals. On the other hand, more traditional voluntary departures are unrelated to changes in price and non-price loan terms.

Performance of Kenyan Listed Companies Pre and Post Chief Executive Officer Dismissal, Retirement and Resignation Events

In the decade between years 2001 – 2011 Kenya experienced change of CEOs of listed firms through dismissal, resignation and retirement which created a need to establish whether CEO departure events had a significant influence on stock returns and profitability of the affected firms. In this research 9 CEO departure events 3 dismissal, 3 retirement and 3 resignation events were analyzed. Abnormal stock returns were computed by employing the market model and profitability of the affected listed firms was measured by employing return on assets (ROA). Paired samples t-test was employed to examine whether there was a significant difference in the abnormal returns and profitability (ROA) during pre and post CEO departure period. The findings indicated that there was no significant difference in abnormal stock returns and profitability in the pre and post CEO departure events. The findings implied that NSE investors were not excited by change of CEOs and that the NSE is semi strong form efficient.