CEO turnover in a competitive assignment framework

Abstract

This paper considers the empirical stylized facts about CEO turnover in the context of a competitive assignment model in which CEOs and firms form matches based on multiple characteristics. CEOs are viewed as hedonic goods with multidimensional skill bundles. Likewise, firms' production functions have heterogeneous weights on CEO skills such as firm-specific knowledge, ability to grow sales, and ability to cut costs. There exists a competitive market for CEOs, whose wages are determined analogously to the prices of the hedonic goods in Rosen (1974). The competitive assignment framework with multiple skill dimensions is able to capture several stylized facts which are not explained by existing theories. For example, in our model, both poor relative performance and poor absolute performance are associated with higher rates of CEO turnover. Relative performance evaluation matters even though there is no agency problem or learning, and overall industry performance affects turnover as well. Our model also makes predictions about the type and pay of the replacement manager conditional on turnover type which are consistent with patterns we document empirically. For example, managers who are fired are more likely to be replaced by industry outsiders than are managers who quit or retire. Moreover, replacement managers in these cases earn significantly more than the incumbent. To document pay and replacement type as a function of the type of turnover event, we construct a large dataset describing turnover events during the period 1992-2006, including the type of turnover event, and the characteristics and pay of the replacement manager.

Corporate distress and turnaround: integrating the literature and directing future research

“…The root cause of corporate decline might significantly moderate the stock market performance effects from management replacement. On the one hand, management retention yields credibility and, thus, positive market returns during uncontrollable external causes, such as political changes or industry decline (Eisfeldt and Kuhnen 2013). On the other hand, the effect of CEO replacement as a reaction to internal turmoil is moderated by various effects and is not directly linked to performance (Dowell et al 2011;Fredrickson et al 1988).…”

CEO Pay and Firm Size: an Update after the Crisis

“…On the theoretical side, it would be good to extend the model to incentives (see Edmans, Gabaix and Landier (2009) and Edmans and Gabaix (2011) for static models that integrate well with GL, and Dittmann et al (2010) for a behavioral approach), in particular with dynamic incentives and CEO turnover (see Jenter and Kanaan, forth;Eisfeldt and Kuhnen, 2012). This remains difficult, though perhaps within reach.…”

Taxing Atlas: Executive compensation, firm size, and their impact on optimal top income tax rates

“…These papers isolate a force for lowering top taxes, like we do, but our mechanism is quite different from theirs. Specifically, in the spirit of Stiglitz (1982), Rothschild and Scheuer (2013) and Scheuer (2014) obtain that reducing taxes on individuals with high ability increases the productivity of lower types, therefore relaxing 7 Other theoretical contributions in this area include Baker and Hall (2004), Edmans and Gabaix (2011), Baranchuk et al (2011), andEisfeldt andKuhnen (2013). An incomplete list of empirical studies emphasizing the key role of CEO abilities include Bertrand and Schoar (2003), Adams et al (2005), Bennedsen et al (2007), Kaplan et al (2012), Custòdio and Metzger (2013), and .…”