CEO Turnover–Performance Sensitivity in Private Firms

Abstract

We compare chief executive officer (CEO) turnover in public and large private firms. Public firms have higher turnover rates and exhibit greater turnover-performance sensitivity (TPS) than private firms. When we control for pre-turnover performance, performance improvements are greater for private firms than for public firms. We investigate whether these differences are due to differences in quality of accounting information, the CEO candidate pool, CEO power, board structure, ownership structure, investor horizon, or certain unobservable differences between public and private firms. One factor contributing to public firms' higher turnover rates and greater TPS appears to be investor myopia.

Do Director Elections Matter?

“…In addition to our main findings above, we also find that firms with large sales, low sales growth, low leverage, and strong institutional presence are more likely to experience CEO turnover. All of these findings are consistent with prior literature (Huson et al, 2001;Gao et al, 2014).…”

“…Coughlan and Schmidt (1985) and Warner, Watts, and Wruck (1988) are the first to show empirically that boards control top management behavior by making compensation and management termination decisions based on firm performance. Other studies further note that firms with outsider-dominated boards, lower managerial ownership, and outside blockholders are significantly more likely than firms with insider-dominated, higher managerial ownership, and a lack of outside blockholders to remove their CEOs on the basis of poor performance (Weisbach, 1988;Denis, Denis, and Sarin, 1997;Jenter and Kanaan, 2010;Gao, Harford, and Li, 2014). We contribute to that literature by introducing Closeness-to-election as a novel factor that affects CEO turnover-performance sensitivity, and by extension, other corporate policies.…”

Stock market listing and the use of trade credit: Evidence from public and private firms

“…Our paper contributes to a growing debate on the impacts of the going-public decision on several important corporate financial policies. Existing studies show that public and dispersed ownership may exacerbate the agency conflicts between managers and shareholders, leading to distortions in cash management (Gao et al, 2013) and investment policies (Asker et al, 2015), as well as suboptimal CEO turnover decisions (Gao et al, 2017). Likewise, going public may disincentivize or affect the quality of innovation (Ferreira et al, 2014;Bernstein 2015).…”

When Ownership Structure Matters: A Review of the Effects of Investor Horizon on Corporate Policies

“…Investigating this issue, Gao et al . () show that there are significant differences in CEO turnover rate between public firms with more short‐term investors and public firms with fewer short‐term investors. They identify investor myopia as being a significant factor contributing to public firm's higher turnover rates and greater turnover‐performance sensitivities.…”