Executive Turnover Research Articles

Bank Networks and Acquisitions

Does the pre-deal geographic overlap of the branches of two banks affect the probability that they merge, post-announcement stock returns, and post-merger performance? We compile information on U.S. bank acquisitions from 1984 through 2016, construct several measures of network overlap, and design and implement a new identification strategy. We find that greater pre-deal network overlap (1) increases the likelihood that two banks merge, (2) boosts the cumulative abnormal returns of the acquirer, target, and combined banks, and (3) reduces employment, boosts revenues, reduces the number of branches, improves loan quality, and expedites executive turnover.

Matching Premiums in the Executive Labor Market

We study whether executives receive pay premiums for the uncertainty of their match with a new firm. Using changes in executive-firm matches from ExecuComp, we document that executives receive significant attraction premiums when they move to new firms. These premiums vary with proxies that capture potential sources of uncertainty about the quality of the match and are incremental to pay for managerial talent, generalist ability, industry turnover risk, and potential additional costs incurred by the new employer to attract the executive to the firm, such as payments for forfeited equity and relocation costs. Consistent with compensation for uncertainty of fit, we find that the premiums decrease with the executive’s tenure at the new firm, as the uncertainty about the executive-firm match is resolved over time. Our findings raise the possibility that attraction premiums are an additional cost of executive turnover and may contribute to the overall rise in executive pay.

What Is the Influence of Lead Independent Directors on Corporate Tax Policy?

In response to corporate governance criticisms from the shareholders, companies voluntarily adopt lead independent directors, a board-of-directors position, to improve corporate governance. Recent research suggests investors positively react to companies' announcement of establishing a lead independent director position because investors believe lead independent directors will reduce agency costs or enhance corporate governance. We find that GAAP effective tax rates are higher for companies with lead independent directors suggesting that lead independent directors have incremental monitoring influence over general board independence on corporate tax policy. Using path analysis, we also find a significant association between lead independent director positions and higher investor valuation through higher GAAP effective tax rates. These results suggest that investors value the corporate governance role of lead independent directors. We also find that investors, on average, favor the more conservative tax policies of companies with lead independent directors. This appreciation of more conservative tax policies is more pronounced when investors understand companies’ tax-related information and companies’ tax policies produce effective tax rates closer to their industry-size quintile mean. We validate our inferences that shareholders value the monitoring influence of lead independent directors on corporate tax policy through decreasing the litigation risk in subsequent periods. Finally, we find a significant association between lead independent directors and higher investor valuation, leading to a lower executive turnover. Overall, our results reveal that investors value the conservative monitoring of corporate tax policy. Our results are robust to entropy balancing and change analysis.

Leaving the Senior Civil Service – public service bargain and beyond: The case of Estonia

The article explores why apolitical public sector managers decide to or are forced to leave the civil service in the example of the Estonian Senior Civil Service. The article shows that the concept of public service bargain can help to understand and systematise the causes of leaving the Senior Civil Service. It is particularly useful in distinguishing between voluntary and involuntary turnover and in linking the turnover with political–administrative relations and loyalty issues. Since public service bargain does not specifically focus on voluntary exit, other approaches known from management literature are relevant for the operationalisation of voluntary turnover and complementing the public service bargain-based model for researching turnover of top executives. The empirical study maps the people who left the Estonian Senior Civil Service in 2009–2013 and analyses and systematises various causes of their departure on the basis of semi-structured interviews (70% response rate). The empirical study shows that the turnover of top executives can be considerable even without much direct political influence. It is found that job insecurity combined with the domination of individual unwritten public service bargains tends to lead to ambiguity in the perception of the roles of top executives, which in turn causes conflicts and dissatisfaction, materialising in high voluntary turnover.

Are Generalists Beneficial to Corporate Shareholders? Evidence from Exogenous Executive Turnovers

This study finds a positive, economically meaningful impact of generalist chief executive officers (CEOs) on shareholder value using 164 sudden deaths and 345 non-sudden exogenous turnovers. The higher a departing CEO’s general ability index (GAI), independently and relative to her successor, the lower is the abnormal stock return to turnover announcements. Returns reflect post-turnover changes in operating performance. Further, CEOs’ and successors’ GAIs are significantly positively related, but only for non-sudden turnovers. Consistently, for sudden deaths, we find positive stock returns to appointments of generalist successors. The results provide a market-based explanation for the generalist pay premium.

Triggering absorptive capacity in organizations: CEO succession as a knowledge enabler

PurposeThe purpose of this paper is to introduce CEO succession (and subsequent TMT turnover) as a knowledge enabler. Focusing on absorptive capacity, an important dynamic capability involving the acquisition, assimilation, transformation and exploitation of knowledge, this paper highlights the role of a new CEO in emphasizing specific facets of the knowledge management (KM) process to fulfill expected strategic mandates.Design/methodology/approachThis paper presents a conceptual framework that underscores the importance of CEO succession as a knowledge enabler by depicting its influence on the various dimensions of absorptive capacity. To this end, this paper develops an integrated set of propositions that unpack the influence of different types of CEO successions that trigger and enable different KM processes involved dimensions of absorptive capacity.FindingsThe theoretical framework presented in this paper suggests that given a certain succession context (forced or voluntary turnover of predecessor) different types of CEO succession, combined with possible executive turnover, will constitute a reorientation in top management experience and expertise. This will in turn trigger certain dimensions of absorptive capacity (potential or realized), to fulfill specific strategic mandates such as strategic change or strategic continuity.Research limitations/implicationsThis paper presents a theoretical framework that underscores the importance of studying CEO succession in conjunction with their influence on different knowledge dimensions of absorptive capacity. CEO succession (and subsequent changes in top management team composition) is suggested to be a knowledge enabler. Based on the context of CEO turnover (forced vs voluntary) and the amount of change undergone in TMT composition, different types of CEO succession (based on their origin) are suggested to have different challenges to overcome and different strategic mandates to fulfill. Fulfilling these strategic mandates will require an emphasis on different facets of the KM process, which is encompassed in the dimensions of absorptive capacity. This will, in turn, resolve questions about which knowledge activities the organization needs to invest its resources in and resources allocation decisions may become easier.Practical implicationsBased on their origin, three kinds of CEO succession have been described in this paper – insider-follower, insider-contender and outsider succession. Each of these types of succession encounter different challenges and are expected to fulfill different kinds of strategic mandates. Accordingly, this paper proposes that each kind of CEO succession trigger and enable the knowledge components of absorptive capacity (knowledge acquisition, knowledge assimilation, knowledge transformation and knowledge exploitation) in different manners. This will in turn, allow firms to prioritize the allocation of resources toward different kinds of knowledge activities related to absorptive capacity.Originality/valueThis paper suggests that the CEO succession event, although broadly discussed in management research, has been overlooked when it comes to KM in organizations. Given that strategic leadership is one of the powerful enablers of organizational practices and outcomes, this paper emphasizes that different types of CEO succession may be able to influence the KM process by enabling the different dimensions of absorptive capacity (potential and realized).

Executive Network Centrality and Stock Liquidity

AbstractWe examine the relationship between stock market liquidity and the network centrality of firm executives. We find that firms whose executive officers are more central in the network of executives have narrower bid‐ask spreads. We use an exogenous network centrality shock of executive turnover and report that liquidity improves after firms hire executives with greater centrality. We present evidence that improved liquidity is attributable to efficient information flows around executives in more advantageous network positions.

Anchoring in Seasoned Equity Offerings: A Regression Discontinuity Approach

The likelihood of seasoned equity offerings (SEOs) jumps discontinuously when the stock price equals the most recent equity offer price. Anchoring on the last offer price holds after considering executive turnovers, stock splits, earnings management, or dividend adjustments. Using a fuzzy regression discontinuity design around this cutoff, which exploits local randomness in stock prices, we investigate the consequences of anchoring in SEOs. We find significant increases in cash holdings and acquisitions of lower quality, with no real effects on investment or employment. Overall, we provide some of the cleanest estimates, to date, of the timing and causal effects of SEOs.

Quest for Status: TMT Status Hierarchy, Status Inequality, and Executive Turnovers

This study proposes and tests a theory of how TMT status hierarchies affect executive turnovers. The status hierarchy in a TMT channels peer respect towards high-status executives and away from low-status executives. As status inequality increases, high- status executives garner more peer respect and get boosts in their self-esteem, whereas low-status executives receive less peer respect and experience drops in self-esteem. Boosts in self-esteem may motivate high-status executives to pursue higher career goals in other firms, whereas drops in self-esteem may motivate low-status executives to join other firms to avoid disrespect by peers. This rationale suggests a positive effect of status inequality on executive turnovers. Further, the status-induced motivations for high- and low- status executives are more likely to result in their turnovers (1) when executives are more likely to secure new jobs in other firms or (2) when their current firms are less likely to facilitate high-status executives¡¯ pursuing higher career goals or low-status executives¡¯ protecting and enhancing their self-esteem. The analysis based on a sample of Chinese firms provides strong support for the theory. This study makes important contributions to executive turnover research in particular and turnover research in general.

Executive Network Centrality and Stock Liquidity

We examine the relationship between stock market liquidity and the network centrality of firm executives. We find that firms whose executive officers are more central in the network of executives have narrower spreads and reduced stock liquidity costs. We use an exogenous network centrality shock of executive turnover and report that liquidity improves after firms hire executives with greater centrality. We present evidence that improved liquidity is attributable to efficient information flows around executives in more advantageous network positions.

International Treaty Ratification and Leader Turnover

Political leaders are ultimately responsible for their country?s foreign policy, but our understanding of how executive turnover affects the likelihood of international treaty ratification remains limited. For contributing to this debate, I define leader change as the replacement of the executive leader by a new one who relies on different social groups for support. Focusing then on those cases where new leaders can assume office only from predecessors who plausibly supported treaty ratification, I expect that ? in light of the predecessor?s support for an agreement and the change in the domestic support base ? leadership turnover makes ratification less likely. The empirical implication is tested with quantitative methods using data on multilateral treaties of the post-Cold War era. The main findings and a series of additional analyses provide strong and robust evidence for the theoretical argument. This research sheds new light on the determinants of multilateral cooperation as well as the role of government leaders in international affairs and foreign-policy decision-making.

Taxes and Peer Effects

ABSTRACTA growing literature examines how a firm's behavior impacts the behavior of its peers. In this paper, we examine how changes in tax paying, and the associated financial reporting, impact a firm's peers. Changes to tax paying and reporting behavior at other firms within a peer group can be affected by many of the same factors, such as industry-level tax policy changes or audit risk, so we make use of exogenous—to the peer firms—shocks to tax behavior. Following the methodology of Dyreng, Hanlon, and Maydew (2010), we estimate managerial tax avoidance fixed effects and use these to identify tax rate shocks associated with executive turnover. We find that peer firms respond to these shocks by changing their GAAP tax rates in the same direction. The magnitude of the effect corresponds to an approximately 10 percent response to the average change in peer group GAAP ETR. Our evidence suggests that these peer effects occur only for book (i.e., financial reporting), rather than cash (i.e., real effects), ETR and are concentrated in firms with potentially greater discretion in reporting taxes on foreign earnings.JEL Classifications: H25; M41.Data Availability: Data used in this study are available from public sources identified in the paper.

Adapting to Radical Change: The Benefits of Short-Horizon Investors

We show that firms with more short-term institutional investors have better long-term performance in dynamic economic environments. Following exogenous increases in competitive pressure due to large cuts of import tariff rates, firms with more short-term investors achieve higher growth rates of sales and employees in comparison to other firms in the industries affected by the tariff cuts. To do so, these firms invest more in fixed assets, R&D, and advertising, and differentiate their products from those of the competitors. Firms with more short-term investors also conduct more diversifying acquisitions and have higher executive turnover in the aftermath of large tariff cuts, suggesting that they put stronger effort in adapting their business to the new competitive environment. These results are not specific to tariff cuts but also robust to increases in competitive pressure due to deregulation shocks. Our findings suggest that firms with more short-horizon investors adapt more promptly to changing economic environments and highlight a potential benefit of short-horizon investors.

Employee Movements from Audit Firms to Audit Clients

Regulators have expressed concerns about the “revolving door” between auditors and clients, whereby audit employees move directly from audit firms to audit clients (i.e., “direct alumni hires”). Regulators are concerned that these direct hires could compromise audit quality, partly because these employees could have previously audited their hiring company’s financial statements. We expand the scope of the analysis by examining employees who move indirectly from audit firms to audit clients and who could not have previously audited the hiring company’s financial statements (i.e., “indirect alumni hires”). We show that indirect hires occur more often than the direct hires that have concerned regulators. We predict and find that both direct and indirect alumni hires are associated with lower rates of executive turnover. There is no evidence that the reduced rates of executive turnover are explained by managerial entrenchment. We also predict and find that both direct and indirect alumni hires are associated with lower rates of audit firm turnover. However, there is little evidence that these hires result in lower audit quality. Overall, our findings suggest that direct and indirect employee movements from audit firms to audit clients are beneficial to executives, audit clients, and audit firms as they reduce the incidence of costly turnover.

Changes in corporate governance and top executive turnover: The evidence from Japan

We examine the turnover of top executives in Japanese firms throughout the period 1990–2013. During this time, the presence of a main bank has been weakened, the ownership of institutional investors has rapidly increased, and independent outside directors have been introduced in many firms. We find that top executive turnover sensitivity to corporate performance has not changed despite skepticism on corporate governance of Japanese firms. On the other hand, there is a shift from return on assets (ROA) to return on equity (ROE) and stock returns as performance indicators that turnover is most sensitive to. We also examine possible sources of this change. We find that foreign institutional investors strengthen the turnover sensitivity to ROE after banking crisis when their shareholding has dramatically increased. This result allows us to interpret that they began to play a disciplinary role. In contrast, we do not find that independent outside directors have any significant effect of enhancing turnover sensitivity to ROE, unless a firm appointed independent outside directors more than three. While the scope of the main bank's authority has substantially contracted, strong ties with main banks increase turnover sensitivity in the more recent period, indicating that main banks continue to perform a certain role in disciplining management.

How Does Intentional Earnings Smoothing Vary With Managerial Ability?

We investigate if high-ability managers are more likely to intentionally smooth earnings, a form of earnings management, and when they are more likely to do so. Although prior studies provide evidence that high-ability managers report higher quality earnings, the literature does not indicate whether this behavior is common because of (or happens in spite of) high-ability managers’ intentional smoothing activities. We find that (a) high-ability managers are significantly more likely to engage in intentional smoothing, (b) their intentional smoothing is associated with improved future operating performance, and (c) their intentional smoothing is more prevalent when the smoothing either benefits shareholders, the manager, or both. We do not, however, find evidence that high-ability managers who smooth are more likely to have engaged in informed trading or are more likely to consume perquisites. High-ability managers’ intentional smoothing is also associated with increased voluntary (but not forced) executive turnover, consistent with high-ability managers being motivated, at least in part, by how the capital market consequences of smoothing are expected to benefit shareholders, thereby bolstering their reputation.

Personal Lending Relationships

ABSTRACTI identify the effects of personal relationships on loan contracting using executive deaths and retirements at other firms as a source of exogenous variation in executive turnover. After plausibly exogenous turnover, borrowers choose lenders with which their new executives have personal relationships 4.1 times as frequently, and loans from these lenders have 20 basis points lower spreads and 12.5% larger amounts. Personal relationships benefit firms across loan terms, especially during macroeconomic downturns. Increased financial flexibility from personal relationships insulated firms from financial shocks during the recent financial crisis: they exhibited less constrained investment and were less likely to layoff employees.

Executive turnover and the valuation of stock options

This paper develops a model for the valuation of executive stock options (ESOs) considering two sources of early exercise: forced exercise due to executive turnover and voluntary exercise due to personal considerations. Using data of about 4000 US executives, I estimate separate hazard rate factor models for both sources of early exercise. In a second step, I combine both conditional hazard exercise models for the valuation of a representative ESO in a Monte Carlo simulation. Analysis of the individual valuation impact of each source of early exercise shows that turnover induced exercises are responsible for most of the valuation discount of ESOs to market traded options. This result is important as most of the current literature on ESOs concentrates solely on voluntary exercises. I further find that the common practice valuation approach suggested by the Financial Accounting Standards Board (FASB) consistently underestimates ESO values.

Worse than others but better than before: Integrating social and temporal comparison perspectives to explain executive turnover via pay standing and pay growth

Organizations often pay greater salaries to higher‐ranking executives compared to lower‐ranking executives. While this method can be useful for retaining those at the organization's apex, it may also incline executives at the bottom of the pay pyramid to see themselves at a disadvantage and thus exit the firm. Naturally, organizations often want to retain some of their lower‐paid, but highly valuable executives; the question, then, is how organizations can reduce the turnover of lower‐ranking executives. By integrating social with temporal comparison theory, we argue that, when executives earn relatively less than their peers, more pay growth (i.e., individual pay increases over time) leads to less turnover. The results of our analysis, which covered almost 20 years of objective data on a large sample of U.S. top executives, provide support for our theory.

Top Management Turnover: The Role of Governing Board Structures

AbstractThe convergence of performance accountability policies, a graying bureaucracy, and shorter executive tenures highlights the timeliness of investigating executive turnover. Prior public administration research has examined pull and push factors linked to these departures, but it has yet to fully explore the influence of governing board structures and political pressures that stem from such structures. Using data on 123 public four‐year research universities in the United States from 1993 to 2012, this article finds that governing board structures play a pivotal role in predicting the departure decisions of university presidents. While the size of the board increases the risk of departure, boards overseeing multiple institutions and boards with a faculty or student representative lower the risk of departure. Additional evidence suggests that both the share of gubernatorial and legislative appointees on the board and the party division of the legislature have a direct influence on departure.