CEO Turnover: Governance, Games and Real Options

<p>The decision a Board of Directors (a board) makes to dismiss or retain its CEO is one of extreme importance in its role of representing shareholder interests and maximising shareholder value. This thesis presents three independent but highly related studies pertaining to the dynamics between a board and its selected CEO in deciding to retain or replace an incumbent manager. The first study presents a theoretical model of CEO turnover that is examined in order to develop new empirical testable predictions. The model employs a learning process for perceived CEO ability that offers new insight into the dynamics of the problem. We find empirical support for the theoretical predictions that: (1) if a CEO sends high noise performance signals to the board relative to the pool of possible replacements, the probability of turnover will be less sensitive early on in the manager’s tenure and more sensitive later due to the learning process; (2) the probability of turnover for a CEO who has a lower level of initial uncertainty relative to a pool of possible replacements will be less sensitive to performance because the CEO will need to be considered high quality to get the position in the first place; and (3) there is empirical evidence to support the notion that ongoing volatility in the board’s estimate of a manager’s ability plays a role in the updating process of ability assessment by a board. Recent empirical work has indicated that board-induced CEO turnover is a function of industry business cycles and not just relative performance evaluation. The literature notes that this could be because: (1) CEOs may optimally be rewarded or punished for peer group performance if a CEO’s actions affect peer performance; (2) boards receive more, or better information in industry downturns than they do during booms; or (3) boards misattribute industry performance to CEO ability. The literature concludes (3) largely due to the results not being sensitive to CEO tenure, where high tenure CEOs should have proven themselves in good and bad times. There is however no theoretical framework to help interpret these empirical findings and we consider conclusions incomplete. It is well established in the macroeconomic literature that downturns are highly correlated with increased levels of uncertainty, and as a result firm behaviour is impacted. The second study in this thesis presents a model of board-induced CEO turnover that allows analysis under two stochastic state variables: (1) perceived managerial ability; and (2) precision of the perceived ability. We use the constructed model to show that, following shocks that increase uncertainty, the probability of turnover for high tenure CEOs may be higher or lower than low tenure CEOs depending on the board’s estimate of CEO ability. This casts doubt on conclusions made from the findings of the empirical literature. The final study presented by this thesis is my job market paper. It presents a new game of performance-induced CEO turnover that analyses CEO turnover decisions in a context where the CEO and the board both have meaningful options. We show that under certain conditions a CEO has the incentive to lock in a high level of perceived ability, through good firm performance, and exercise their option to leave for other roles and increased prestige. This creates an upper and lower threshold for performance-induced CEO turnover. The lower threshold relates to the board’s option to terminate a low-quality CEO and the upper threshold relates to a high-quality CEO’s option to leave the firm. The upper threshold creates a credible threat for the board that affects its decision making. We define two types of threats: (1) the persistent threat, where the firm is one where the incumbent and any replacement will have an upper threshold; and (2) a unique threat, where only the incumbent has the upper threshold and replacements are taken from a pool of candidates who do not have an upper threshold. We estimate that both threat types have a negative impact on firm value. Empirically we find that consistent with the theory, the probability of a turnover event increases following positive relative accounting performance for small firms and firms with young CEO’s, indicating upper threshold constraints for these two groups.</p>

CEO Turnover: Governance, Games and Real Options

<p>The decision a Board of Directors (a board) makes to dismiss or retain its CEO is one of extreme importance in its role of representing shareholder interests and maximising shareholder value. This thesis presents three independent but highly related studies pertaining to the dynamics between a board and its selected CEO in deciding to retain or replace an incumbent manager. The first study presents a theoretical model of CEO turnover that is examined in order to develop new empirical testable predictions. The model employs a learning process for perceived CEO ability that offers new insight into the dynamics of the problem. We find empirical support for the theoretical predictions that: (1) if a CEO sends high noise performance signals to the board relative to the pool of possible replacements, the probability of turnover will be less sensitive early on in the manager’s tenure and more sensitive later due to the learning process; (2) the probability of turnover for a CEO who has a lower level of initial uncertainty relative to a pool of possible replacements will be less sensitive to performance because the CEO will need to be considered high quality to get the position in the first place; and (3) there is empirical evidence to support the notion that ongoing volatility in the board’s estimate of a manager’s ability plays a role in the updating process of ability assessment by a board. Recent empirical work has indicated that board-induced CEO turnover is a function of industry business cycles and not just relative performance evaluation. The literature notes that this could be because: (1) CEOs may optimally be rewarded or punished for peer group performance if a CEO’s actions affect peer performance; (2) boards receive more, or better information in industry downturns than they do during booms; or (3) boards misattribute industry performance to CEO ability. The literature concludes (3) largely due to the results not being sensitive to CEO tenure, where high tenure CEOs should have proven themselves in good and bad times. There is however no theoretical framework to help interpret these empirical findings and we consider conclusions incomplete. It is well established in the macroeconomic literature that downturns are highly correlated with increased levels of uncertainty, and as a result firm behaviour is impacted. The second study in this thesis presents a model of board-induced CEO turnover that allows analysis under two stochastic state variables: (1) perceived managerial ability; and (2) precision of the perceived ability. We use the constructed model to show that, following shocks that increase uncertainty, the probability of turnover for high tenure CEOs may be higher or lower than low tenure CEOs depending on the board’s estimate of CEO ability. This casts doubt on conclusions made from the findings of the empirical literature. The final study presented by this thesis is my job market paper. It presents a new game of performance-induced CEO turnover that analyses CEO turnover decisions in a context where the CEO and the board both have meaningful options. We show that under certain conditions a CEO has the incentive to lock in a high level of perceived ability, through good firm performance, and exercise their option to leave for other roles and increased prestige. This creates an upper and lower threshold for performance-induced CEO turnover. The lower threshold relates to the board’s option to terminate a low-quality CEO and the upper threshold relates to a high-quality CEO’s option to leave the firm. The upper threshold creates a credible threat for the board that affects its decision making. We define two types of threats: (1) the persistent threat, where the firm is one where the incumbent and any replacement will have an upper threshold; and (2) a unique threat, where only the incumbent has the upper threshold and replacements are taken from a pool of candidates who do not have an upper threshold. We estimate that both threat types have a negative impact on firm value. Empirically we find that consistent with the theory, the probability of a turnover event increases following positive relative accounting performance for small firms and firms with young CEO’s, indicating upper threshold constraints for these two groups.</p>

Analysis of Factors Affecting the Restatement of Financial Statements

The convergence of IFRS has brought an impact on the changes of financial accounting standards in Indonesia. The variation provide an opportunity for the restatement of financial statements. Therefore, this study aimed to examine CEO turnover, earnings management, and audit quality on the restatement of financial statements of manufacturing companies listed on the Indonesia Stock Exchange (IDX) during the period of2014 to 2018. In this study, purposive sampling method was carried out to consider samples with predetermined criteria. The obtained data were about 376 and analyzed using logistic regression with the SPPS 24.0 tool. As the results of data analysis, this study indicated that the CEO turnover had a positive effect on restatement; the earnings management had a positive effect on restatement; and the audit quality had no effect on restatement of financial statements.

Institutional change of compensation policy and its impact on CEO turnover and firm performance

The existing corporate governance literature has mostly focused on micro-level studies of executive compensation, with limited attention paid to influential macro-level factors such as institutions and institutional changes and their impacts on corporate governance and performance. The implementation of the new compensation policy that restricts CEO compensation ceiling in state-owned firms in China offers an ideal context for us to study how institutional changes and firms’ adoption of these changes can influence CEO turnover and firm performance. Our empirical analyses reveal that the positive impact of new compensation policy adoption on CEO turnover is stronger for CEOs with originally higher compensation. The impact of new compensation policy adoption on firm performance, however, is negative, and the negative impact is contingent upon a firm’s market share and tech intensity. Our research contributes to the literature on corporate governance by theorizing and empirically demonstrating the critical role that institutions play in corporate governance.

How and when economic policy uncertainty influences firms' strategic change: the role of CEO turnover and organizational inertia

PurposeMany studies have examined the antecedents of firms' strategic change on a micro and meso level, but few studies have explored it from the macrolevel (e.g. economic policy uncertainty) perspective. This research draws attention to the impact of economic policy uncertainty on firms' strategic change.Design/methodology/approachThis research empirically tests hypotheses based on a sample of listed firms in China during the period between 2010 and 2017.FindingsBased on real options theory, the authors theorize and find that economic policy uncertainty will negatively affect firms' strategic change through the mediating effect of CEO turnover. Moreover, organizational inertia will strengthen the negative impact of economic policy uncertainty on CEO turnover and will weaken the positive impact of CEO turnover on firms' strategic change.Originality/valueFirst, this research contributes to the strategic change literature by demonstrating the important impact of economic policy uncertainty on firms' strategic change. Second, this research expands the literature on the economic consequences of economic policy uncertainty. Third, this research clarifies the path and boundary conditions of economic policy uncertainty affecting strategic change by introducing the mediating effects of CEO turnover and the moderating effects of organizational inertia.

CEO Turnover and the Engagement Quality Reviewer’s Audit Effort

Previous literature on the engagement quality (EQ) review argues that EQ reviewers should provide more efforts into the review process when fieldwork auditors’ judgments and conclusions on the financial statements are potentially biased. Little empirical study has been done, however, partly due to the confidentiality of the detailed data on EQ reviewers’ audit hours. The purpose of the article is to shed light on the existing literature by conducting an empirical investigation using a unique actual data set available in Korea. The results show that the EQ review hours are positively associated with CEO turnovers, a proxy for the audit risk, which supports the prediction of the theory on the EQ review. Additional analyses show that such results are stronger under (a) the upward earnings management and (b) the forced CEO turnover. The article extends the existing literature on the EQ review process and enhances the understanding of the engagement-level quality control in the volatile audit environment by providing empirical evidence to the analytic discussions on the EQ review.

CEO Turnover, Leadership Identity, and TMT Creativity in a Cross-Cultural Context

Whether chief executive officer (CEO) turnover can improve top management team (TMT) creativity is an important issue that remains to be solved. Based on the theoretical background of CEO turnover, team creativity, and cross-cultural context, this study proposes a theoretical model to answer the question and introduces leadership identity as a moderator simultaneously. The multiple regression analysis of data obtained from 903 executives in 104 top management teams revealed CEO voluntary resignation/internal succession pattern, CEO voluntary resignation/external succession pattern, and CEO forced resignation/internal succession pattern separately had a significant positive impact on TMT creativity in a cross-cultural context; leadership identity partially moderated the relationship between CEO turnover and TMT creativity. According to these findings, only three patterns of CEO turnover could promote TMT creativity, and leadership identity enhanced the positive effects of CEO voluntary resignation/internal succession pattern, CEO voluntary resignation/external succession pattern, and CEO forced resignation/internal succession pattern on TMT creativity in a cross-cultural context. These made up for the lack of theoretical research on the relationships among CEO turnover, TMT creativity and leadership identity, which could provide the scientific guidance to conduct the CEO turnover practice and improve TMT creativity in a cross-cultural context.

CEO turnover in public and private organizations: analysis of the relevance of different performance horizons

PurposeThis paper investigates how past performance changes, prior CEO replacements and changes in the chairperson impact CEO turnover in public and large private businesses.Design/methodology/approachWe analyze 1,679 CEO replacements documented in a sample of 1,493 Spanish public and private firms during 1998–2004 by computing dynamic binary choice models that control for endogeneity in CEO turnovers.FindingsThe results reveal that different performance horizons (short- and long-term) explain the dissimilar rate of CEO turnover between public and private firms. Private firms exercise monitoring patience and path dependency characterizes the evaluation of CEOs, while public companies' short-termism leads to higher CEO turnover rates as a reaction to poor short-term economic results, and alternative controls—ownership and changes in the chairperson—improve the monitoring of management.Originality/valueOur results show the importance of controlling for path dependency to examine more accurately top executives' performance. The findings confirm that exposure to market controls affects the functioning of internal controls in evaluating CEOs and shows a short-term performance horizon that could be behind the recent moves of public firms going private or restraining shareholders' power.