Forced Turnover Research Articles

Contractual vs. Actual Separation Pay Following CEO Turnover

Using hand-collected data, we document the details of the ex ante severance contracts and the ex post separation pay given to S&P 500 chief executive officers (CEOs) upon departing from their companies. We analyze what determines whether or not a CEO receives separation pay in excess of the amount specified in the severance contract. We find that discretionary separation pay is given to about 40% of departing CEOs and is, on average, $8 million, which amounts to close to 242% of a CEO’s annual compensation. We investigate the determinants of discretionary separation pay and find, for example, that discretionary separation pay positively correlates with weak internal governance in cases of voluntary CEO turnover but not when the CEO is forced out. We also find that discretionary pay is higher when the CEO has a noncompete clause in her ex ante severance contract. Event study analysis suggests that shareholders benefit from discretionary separation pay in forced turnovers but not in voluntary ones. Our overall results help to shed light on the complex role of discretionary separation pay in the bargaining game between boards and departing executives. This paper was accepted by Itay Goldstein, finance.

The Role of Deferred Pay in Retaining Managerial Talent

We examine the role of deferred vesting of stock and option grants in reducing executive turnover. To the extent an executive forfeits all unvested stock and option grants if she leaves the firm, deferred vesting will increase the cost (to the executive) of early exit. Using pay Duration proposed in Gopalan, et al. (2014) as a measure of the extent of deferred vesting, we find that CEOs and non-CEO executives with longer pay Duration are less likely to leave the firm voluntarily. Employing the vesting of a large prior-year stock/option grant as an instrument for Duration, we find the effect to be causal. Consistent with long pay Duration reflecting firms’ retention intentions, CEOs with longer pay Duration are also less likely to experience a forced turnover and the sensitivity of forced turnover to firm performance is significantly lower among firms that grant longer pay Duration. Overall, our study highlights a strong link between compensation design and turnover of top executives.

Does Job Security Concern Acquiring Managers?

The threat of forced turnover discourages CEOs from engaging in misbehaviors up front. Using the CEO dismissal hazard as the measure of the job (in)security, we find that CEOs with higher dismissal risk pursue fewer acquisitions; especially these CEOs chase value-destroying deals less frequently. The announcement return is higher when the acquiring CEOs are more disciplined by the threat of CEO dismissal and this superior performance can be partly explained by more effort exerted by these CEOs to achieve a better share of acquisition value split. Our findings suggest that the threat of forced turnover is an effective internal mechanism of corporate governance.

Product Market Competition Shocks, Firm Performance, and CEO Turnover

We examine the effect of competition shocks induced by major industry-level tariff cuts on forced CEO turnover. Both the likelihood of forced CEO turnover and its sensitivity to performance increase, particularly for firms with low productivity and high default risk. While CEO’s incentive pay and pay-performance sensitivity increase in firms with strong governance, CEOs are more likely to be forced out in firms with weak governance, especially if there is director turnover. New outside CEOs receive higher incentive pay and have experience in firms with lower cost structures and higher asset sales. Performance and productivity improve after forced turnover.

Costs of Including Accounting Performance Goals in Executive Compensation

Using a large dataset of performance goals employed in executive incentive contracts we find that a disproportionately large number of firms exceed their goals by a small margin as compared to the number that fall short of the goal by a similar margin. This asymmetry is particularly acute for earnings and profit goals, when compensation is contingent on a single goal and is present for both long-term and short-term goals, when the pay-for-performance relationship is concave or convex and for grants with cash or stock payout. Firms that exceed their compensation target by a small margin are more likely to beat the target the next period and CEOs of firms that miss their targets are more likely to experience a forced turnover. Firms that just exceed their EPS goals have higher abnormal accruals and lower Research and Development (R&D) expenditures and firms that just exceed their profit goals have lower SG&A expenditures. Overall, our results highlight some of the costs of linking managerial compensation to specific compensation targets.

Who Captures the Power of the Pen?

We study how political capture affects the corporate governance role of the media. Relying on a unique media market in China that is characterized by the prevalence of both state-controlled and market-oriented media, we manually construct a comprehensive financial news sample containing 80,008 articles during the 2004-2010 period and provide evidence that negative coverage by the market-oriented media significantly increases the chance of forced top executive turnover, whereas similar coverage by the state-controlled media has no such impact. Tests based on instrumental variable and exogenous experiments provide positive evidence of the casual link.

Financial Restatement and CEO Turnover in Malaysia

This study examines the incidence of financial restatement in CEO turnover firms. Using 78 CEO turnover firms from 2008 to 2010 among nonfinancial institution, we find that the age of the CEO influences restatement in the year prior to the CEO turnover. Specifically, older CEOs have higher probability of restating financial statements as they may be pressing for the last bonus/pay that they would likely receive. In contrast, we find that CEOs with forced turnover are less likely to be involved with restatements. This contradicting result may be due to the limited control of financial and accounting matters by the outgoing CEO as compared to the board of directors. Firm characteristics such as size, Big 4, and growth as measured by the market to book value have a positive relationship with restatement, which suggests that big companies with high growth have higher probability of restatement. The study also supports the argument of debt as a monitoring cost as debt is argued to constraint opportunistic earnings management behavior including restatement.

Real Earnings Management and CFO Turnover-Evidence from China

This study investigates whether a firm’s forced CFO turnover is influenced by the extent of a firm’s real earnings management (REM) activities in China. We find that the likelihood of forced CFO turnover is positively associated with the extent of REM, contrast to no such association for voluntary CFO turnover. Such association is primarily due to the manipulation of discretionary expenses, but not manipulation of production costs or cash flow management. Our findings are robust after controlling for the effect of accrual earnings management (AEM), firm performance, and corporate governance. We also address such issues as endogeneity, persistence of REM after CFO’s turnover, the impact of directions of REM on CFO turnover and the effect of CEO turnover. Our findings indicate that boards of directors in China play an important role in disciplining CFOs when they engage in REM activities.

Board Member Private Information and Insider Trading Around CEO Turnovers

Theories of corporate boards assume that board members of a firm generate private information about the quality and performance of its CEO in the process of monitoring and advising him, and may use this information to decide whether or not to fire him. In this paper, I make use of data on insider trading around CEO turnovers to analyze, for the first time in the literature, whether board members indeed possess private information about CEO quality and the firm's prospects subsequent to a CEO turnover. I document the trading pattern of three types of firm insiders: board members, top corporate officers (excluding board members and the CEO), and the CEO himself. I then study whether trading by insiders (board members and top corporate officers) has predictive power for the nature of CEO turnovers (forced versus voluntary versus no turnover); the announcement effect of a CEO turnover; and the long-run post-turnover stock return performance of the firm. I find that trading by board members has predictive power for the nature of CEO turnovers: the larger the net selling from board members, the higher the probability of a forced turnover. Further, trading by members of more independent boards, larger boards, and boards with less entrenched CEOs has greater predictive power. Trading by board members also has predicative power for the announcement effects of a forced CEO turnover: a larger amount of selling by board members is associated with a more favorable announcement effect. Trading by board members immediately after a forced CEO turnover also has significant predictive power for subsequent long-run stock returns: the larger the net buying by board members, the better the subsequent long-run stock returns. Overall, my results are broadly consistent with the notion that board members possess private information about the firm and its CEO around the time of a CEO turnover.

Do Institutional Investors Have Private Information About CEO Turnovers?

We use proprietary institutional trading data to analyze the efficacy of information production by institutions around CEO turnovers; CEO turnovers where such information production is most effective; and how institutions produce such information. We find that institutional trading prior to a CEO turnover has significant predictive power for the nature of a CEO turnover (forced versus voluntary). Institutions produce information partly by analyzing insider trading prior to a CEO turnover. Trading by institutions after a forced turnover with an insider as successor CEO has significant predictive power for subsequent long-run stock returns, and realizes significant abnormal profits.

Executive Turnover Following Option Backdating Allegations

ABSTRACT:We find that the likelihood of forced turnover in the CEO and CFO positions is significantly higher for firms in the aftermath of option backdating than in propensity-score matched control firms. Forced turnover occurs in about 36 percent of the accused firms. The forced turnover rates for CEOs and CFOs are similar and several times higher than normal. The displaced managers are further punished by the managerial labor market, as they are much less likely than control firm managers to be rehired at comparable positions. We also find that backdating firms restructure CEO compensation to rely less on stock options. Finally, we learn the higher turnover extends to the General Counsel. While boards are often viewed as unresponsive to criticisms involving executive compensation, they did respond quite decisively to option backdating allegations and the accompanying adverse publicity.Data Availability: All data used in this study are publicly available from the sources indicated.

Executive Turnover Following Option Backdating Allegations

We find the likelihood of forced turnover in the CEO and CFO positions is significantly higher in the aftermath of option backdating than in propensity-score-matched control firms. Forced turnover occurs in about 36 percent of the accused firms. The forced turnover rates for CEOs and CFOs are similar and several times higher than normal. The displaced managers are further punished by the managerial labor market, as they are much less likely than control firm managers to be rehired at comparable positions. We also find that backdating firms restructure CEO compensation to rely less on stock options. Finally, we learn the higher turnover extends to the General Counsel. While boards are often viewed as unresponsive to criticisms involving executive compensation, they did respond quite decisively to option backdating allegations and the accompanying adverse publicity.

The Role of Lending Banks in Forced CEO Turnovers

This article investigates the governance role of banks exercised through the replacement of underperforming CEOs in borrowing firms. An average level of bank loans outstanding implies a 22% to 47% increase in the forced turnover probability of a borrowing firm’s CEO if a firm’s industry adjusted performance is one standard deviation below average. This increase is much larger, 68% to 92%, when an underperforming firm violates its loan covenants. Overall, the paper’s findings suggest that banks play a key role in the governance of underperforming firms, especially when covenants are violated.

Dynamic Compensation Contracts with Private Savings

This article studies a dynamic agency problem in which a risk-averse agent can save privately. In the optimal contract, (i) cash compensations exhibit downward rigidity to failures; (ii) permanent pay raises occur when the agent’s historical performance is sufficiently good; (iii) and when the agent is dismissed due to poor performance, he walks away with severance pay to support his post-firing consumption at the current compensation level. Thus, the theory can simultaneously explain the popularity of optionslike compensation contracts and the increasing incidence of forced turnovers with sizeable severance pay. (JEL D86, J31, J33)

CEO pay cuts and forced turnover: Their causes and consequences

We study large discrete decreases in CEO pay and compare them to CEO forced turnover. The determinants are similar, as are the performance improvements after the action. After the pay cut, the CEO pay-for-performance sensitivity is abnormally high, such that the CEO can restore his pay level by reversing the poor performance. After either a pay cut or forced turnover, CEOs reduce investment and leverage, and improve performance, on average. Together, our results show that the possibility of these large compensation cuts provides ex ante incentives for CEOs to exert effort to avoid poor performance and that CEOs take actions to improve poor performance once pay is cut. The similarity of the causes and outcomes of large pay cuts compared to forced turnover suggests that large pay cuts are used as a substitute for forced turnover, helping to explain why forced turnover is rare.

Are Political Connections a Blessing or a Curse? Evidence from CEO Turnover in China

ABSTRACTManuscript Type: EmpiricalResearch Question/Issue: This paper investigates the issue of forced CEO turnover in China and summarizes the economic consequences of political connections within the framework of corporate governance.Research Findings/Insights: Using a large sample of listed firms in China from 2005 to 2008, we find that politically connected CEOs are less likely to be fired and that the sensitivity of forced turnover to firm performance is weaker for connected CEOs than for their non‐connected peers. This suggests that CEOs in a transition economy tend to use their political resources for their own good. We also find a significantly positive relationship between the political connections of retained CEOs and future firm performance only when firm profitability is below the industry median. These findings suggest that the value of political connections is contingent on a firm's operating performance, and that the benefits of political connections may outweigh their costs when firms do not meet their profitability targets.Theoretical/Academic Implications: This study is the first to examine how the political ties of CEOs relate to their forced turnover. It integrates agency theory with resource dependence theory and contributes to the ongoing debate on the role of political connections in emerging markets. It also takes a step toward reconciling the mixed evidence for the effects of political connections on firm performance by demonstrating a sharp difference between firms under different operating statuses.Practitioner/Policy Implications: This study offers insights to policy makers who are interested in improving corporate governance in transitional economies such as China, where CEOs have close connections with the government. It also provides a deep perspective for the boards in politically connected firms, allowing them to deal with the relationship between top management and the government in a healthy way.

CEO Pay Cuts and Forced Turnover: Their Causes and Consequences

We study large discrete decreases in CEO pay and compare them to CEO forced turnover. The determinants are similar, as are the performance improvements after the action. After the pay cut, the CEO pay-for-performance sensitivity is abnormally high, such that the CEO can restore his pay level by reversing the poor performance. After either a pay cut or forced turnover, CEOs reduce investment and leverage, and improve performance, on average. Together, our results show that the possibility of these large compensation cuts provides ex ante incentives for CEOs to exert effort to avoid poor performance and that CEOs take actions to improve poor performance once pay is cut. The similarity of the causes and outcomes of large pay cuts compared to forced turnover suggests that large pay cuts are used as a substitute for forced turnover, helping to explain why forced turnover is rare.

Self-Serving Attribution Bias and CEO Turnover: Evidence from CEO Interviews on CNBC

Self-serving attribution bias (SAB, hereafter) is a type of misattribution bias in which CEOs attribute the out-performance of the company to their own abilities, and under-performance of the company to bad luck or the economy. Using the transcripts of CEO interviews on CNBC, we find that the stock market response to the interviews of CEOs with self-referencing behavior is negative. Moreover, the CEOs with SAB are more likely to be fired and more sensitively to performance, especially if the governance is stronger. We also find that the stock market response to the announcement of forced turnovers of CEOs with SAB are significantly more positive by up to 9.7% over the event window of [-1,1] days. While we find the negative tone of the interviewing journalists increases the likelihood of forced CEO turnover and increases the turnover-performance sensitivity, the correlation between turnover and SAB is robust.

Bid Resistance by Takeover Targets: Managerial Bargaining or Bad Faith?

This paper examines management’s motives for rejecting takeover bids and the associated shareholder wealth effects. We develop several measures of initial bid quality and find a significant negative correlation between contested offers and bid quality. The likelihood of higher follow-on offers decreases in bid quality and is greater when targets have classified boards and CEOs have significant personal wealth tied to the transaction. Moreover, CEOs who fail to close high quality offers experience a significant rate of forced turnover. Overall, the results support a price improvement motive for contested bids.

CEO optimism and forced turnover

We show theoretically that optimism can lead a risk-averse Chief Executive Officer (CEO) to choose the first-best investment level that maximizes shareholder value. Optimism below (above) the interior optimum leads the CEO to underinvest (overinvest). Hence, if boards of directors act in the interests of shareholders, CEOs with relatively low or high optimism face a higher probability of forced turnover than moderately optimistic CEOs face. Using a large sample of turnovers, we find strong empirical support for this prediction. The results are consistent with the view that there is an interior optimum level of managerial optimism that maximizes firm value.