The Impact of Firm Performance Expectations on CEO Turnover and Replacement Decisions

Abstract

Our analysis suggests that boards focus on deviation from expected performance, rather than performance alone, in making the CEO turnover decision, especially when there is agreement (less dispersion) among analysts about the firm's earnings forecast or there are a large number of analysts following the firm. In addition, our results suggest that boards are more likely to appoint a CEO that will change firm policies and strategies (i.e., an outsider) when forecasted 5-year EPS growth is low and there is greater uncertainty (more dispersion) among analysts about the firm's long-term forecasts.

CEO Accountability for Corporate Fraud: Evidence from the Split Share Structure Reform in China

“…The negative relationship between CEO dismissal and firm performance is well established in the literature (Denis and Kruse 2000;Farrell and Whidbee 2003). However, the board's decision to dismiss a CEO for poor performance can be affected by many socio-political factors.…”

Board influence on the selection of external accounting executives

“…Early management research typically relied on earnings and returns measures of performance to separate disciplinary from voluntary turnover, at least implicitly suggesting poor performance is associated with forced CEO turnover (Dalton and Kesner 1985;Boeker and Goodstein 1993;Cannella and Lubatkin 1993). Other work has controlled for financial performance, relying on more direct evidence from press reports to this end (e.g., Weisbach 1988;Borokhovich et al 1996;Parrino 1997;Huson et al 2001;Farrell and Whidbee 2003). The results uniformly suggest that the incidence of external appointments to the CEO position is significantly higher following forced compared to voluntary turnover.…”

“…We also control for the firm's operating performance (e.g., Farrell and Whidbee, 2003) given that the choice between an external vs. an internal candidate may depend on contemporaneous firm performance. Performance is measured by return on assets and defined as operating income after depreciation (OIAD; line item 178) divided by total assets.…”

“…The CEO succession literature has long recognized the importance of successor origin, illuminating the contrast between internal and external CEO selection (e.g., Dalton and Kesner 1985;Cannella and Lubatkin 1993;Parrino 1997;Huson et al 2001;Farrell and Whidbee 2003). ii Top accounting executives are typically titled controllers or Chief Accounting Officers and frequently carry the vice president's title.…”

Using model-based expectations to predict voluntary turnover

“…Thus, it is appropriate to include both a gap between actual performance and expectations as well as performance in a model to predict turnover (e.g., Farrell & Whidbee, 2003). Further, it is important to consider the differential influence that positive and negative gaps of similar magnitude may have on satisfaction and turnover (Bentein et al, 2005;Yi & La, 2003).…”