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CEO Turnover and Volatility under Long-Term Employment Contracts

Published online by Cambridge University Press:  20 August 2019

Peter Cziraki Open the ORCID record for Peter Cziraki [Opens in a new window]  and
Moqi Groen-Xu
Peter Cziraki*
Affiliation:
Cziraki, [email protected], University of Toronto Department of Economics
Moqi Groen-Xu
Affiliation:
Groen-Xu, [email protected], London School of Economics Department of Finance
*
Cziraki (corresponding author), [email protected]
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Abstract

We study the role of the contractual time horizon of chief executive officers (CEOs) for CEO turnover and corporate policies. Using hand-collected data on 3,954 fixed-term CEO contracts, we show that remaining time under contract predicts CEO turnover. When contracts are close to expiration, turnover is more likely and is more sensitive to performance. We also show a positive within-CEO relation between remaining time under contract and firm risk. Our results are similar across short and long contracts and are driven neither by firm or CEO survival, nor technological cycles. They are consistent with incentives to take long-term projects with interim volatility.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 55 , Issue 6 , September 2020 , pp. 1757 - 1791
Copyright
Copyright © Michael G. Foster School of Business, University of Washington 2019

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Footnotes

We are grateful to Pat Akey, David Denis, Alex Edmans, Andrew Ellul (discussant), Daniel Ferreira, Juanita Gonzalez-Uribe (discussant), Jonathan Hall, Jarrad Harford (the editor), Dirk Jenter, David Koslowsky (discussant), Katharina Lewellen (discussant), Stefan Lewellen (discussant), James S. Linck (discussant), Robert McMillan, Kevin Murphy (the referee), Daniel Paravisini, Luc Renneboog, David Robinson, Michel Serafinelli, Rui Silva, and Morten Sørensen (discussant) as well as participants at the CEAR Symposium on Corporate Control Mechanisms and Risk, the 2014 European Finance Association Meetings, the 2015 Financial Intermediation Research Society Conference, the 2016 Young Scholars Finance Consortium, the 2014 Northern Finance Association Meetings, the 2014 Warwick Business School Frontiers of Finance Conference, and seminars at the University of Geneva, University of Toronto, and York University for their comments. We also thank Steve Hillegeist, Holger Jahn, Christian Maennlin, and Jean-Luc Mauron for useful discussions on disclosure and contract design practice, and Dirk Jenter, Fadi Kanaan, Florian Peters, and Alexander Wagner for sharing their turnover data. Cziraki acknowledges financial support from CentER and TILEC at Tilburg University, from a Social Sciences and Humanities Research Council of Canada Institutional Grant, and from the National Excellence in Higher Education Program in Hungary (contract number 20765-3/2018/FEKUTSTRAT). Groen-Xu acknowledges financial support from the INSEAD Alumni Fund.

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