Hostname: page-component-cd9895bd7-gbm5v Total loading time: 0 Render date: 2024-12-28T20:22:32.209Z Has data issue: false hasContentIssue false
  • English
  • Français

How Does Forced-CEO-Turnover Experience Affect Directors?

Published online by Cambridge University Press:  22 July 2020

Jesse Ellis ,
Lixiong Guo  and
Shawn Mobbs Open the ORCID record for Shawn Mobbs [Opens in a new window]
Jesse Ellis
Affiliation:
North Carolina State University Poole College of [email protected]
Lixiong Guo
Affiliation:
University of Alabama Culverhouse College of [email protected]
Shawn Mobbs*
Affiliation:
University of Alabama Culverhouse College of [email protected]
*
[email protected] (corresponding author)
Get access Rights & Permissions [Opens in a new window]

Abstract

We study changes in independent director behavior and labor-market outcomes after the experience of a forced Chief Executive Officer (CEO) turnover. We find that independent directors are more willing to fire CEOs of underperforming firms, hire outside CEOs after a firing, and encourage better board-meeting attendance by fellow directors. We also find that the shareholders of poorly performing firms react positively when experienced directors join the board. It does come with a small cost for directors, in terms of additional directorships, although the cost is not as great as that for directors who do not fire the CEO of a poorly performing firm.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 56 , Issue 4 , June 2021 , pp. 1163 - 1191
Copyright
© THE AUTHOR(S), 2020. PUBLISHED BY CAMBRIDGE UNIVERSITY PRESS ON BEHALF OF THE MICHAEL G. FOSTER SCHOOL OF BUSINESS, UNIVERSITY OF WASHINGTON

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

Footnotes

We thank an anonymous referee, Renee Adams, Anup Agrawal, Martin Boyer (discussant), Rüdiger Fahlenbrach (discussant), Michael Faulkender (discussant), Todd Gormley, Jarrad Harford (the editor), Chang-Mo Kang, Jungmin Kim (discussant), Lubomir Litov, Ronald Masulis, Marco Navone (discussant), Buhui Qiu (discussant), Joshua Pierce, Xian Sun (discussant), David Yermack, Adam Yore, and Wanli Zhao and seminar participants at the Northern Finance Association (NFA) Meeting, Financial Intermediation Research Society (FIRS) Conference, European Finance Association (EFA) Meeting, China International Conference in Finance (CICF), Financial Research Network (FIRN) Meeting, Financial Management Association (FMA) Asia/Pacific Conference, University of Georgia, University of Mississippi, University of New South Wales, University of Sydney, and University of Adelaide. Mobbs gratefully acknowledges financial support from the C. T. Fitzpatrick Chair of Value Investing.

References

Arrow, K. “The Economic Implications of Learning by Doing.” Review of Economic Studies, 29 (1962), 155–173.10.2307/2295952CrossRefGoogle Scholar
Arthur, B. W. “Designing Economic Agents That Act Like Human Agents: A Behavioral Approach to Bounded Rationality.” American Economic Review, 81 (1991), 353–359.Google Scholar
Cai, J., and Nguyen, T.. “Disciplinary Directors: Evidence from the Appointments of Outside Directors Who Have Fired CEOs.” Journal of Banking & Finance, 96 (2018), 221–235.10.1016/j.jbankfin.2018.09.012CrossRefGoogle Scholar
Calinski, R. B., and Harabasz, J.. “A Dendrite Method for Cluster Analysis.” Communications in Statistics, 3 (1974), 1–7.Google Scholar
Chiang, Y.; Hirshleifer, D.; Qian, Y.; and Sherman, A.. “Do Investors Learn from Experience? Evidence from Frequent IPO Investors.” Review of Financial Studies, 24 (2011), 1560–1589.10.1093/rfs/hhq151CrossRefGoogle Scholar
Coles, J.; Daniel, N.; and Naveen, L.. “Co-Opted Boards.” Review of Financial Studies 27 (2014), 1751–1796.10.1093/rfs/hhu011CrossRefGoogle Scholar
Cornelli, F.; Kominek, Z.; and Ljungqvist, A.. “Monitoring Managers: Does It Matter?” Journal of Finance, 68 (2013), 431–481.10.1111/jofi.12004CrossRefGoogle Scholar
Cross, J. G. “A Stochastic Learning Model of Economic Behavior.” Quarterly Journal of Economics, 87 (1973), 239–266.10.2307/1882186CrossRefGoogle Scholar
Dahya, J.; McConnell, J.; and Travlos, N.. “The Cadbury Committee, Corporate Performance, and Top Management Turnover.” Journal of Finance, 67 (2002), 461–483.10.1111/1540-6261.00428CrossRefGoogle Scholar
Dass, N.; Kini, O.; Nanda, V.; Onal, B.; and Wang, J.. “Board Expertise: Do Directors from Related Industries Help Bridge the Information Gap?” Review of Financial Studies, 27 (2014), 1533–1592.10.1093/rfs/hht071CrossRefGoogle Scholar
Defond, M.; Hann, R. N.; and Hu, X.. “Does the Market Value Financial Expertise on the Audit Committees of Boards of Directors?” Journal of Accounting Research, 43 (2005), 153–193.10.1111/j.1475-679x.2005.00166.xCrossRefGoogle Scholar
Denis, D. J.; Denis, D. K.; and Sarin, A.. “Ownership Structure and Top Executive Turnover.” Journal of Financial Economics, 45 (1997), 193–221.10.1016/S0304-405X(97)00016-0CrossRefGoogle Scholar
Dittmar, A., and Duchin, R.. “Looking in the Rearview Mirror: The Effect of Managers’ Professional Experience on Corporate Financial Policy.” Review of Financial Studies, 29 (2016), 565–602.Google Scholar
Eisfeldt, A. L.; and Kuhnen, C. M.. “CEO turnover in a competitive assignment framework.” Journal of Financial Economics, 109 (2013), 351-372.10.1016/j.jfineco.2013.02.020CrossRefGoogle Scholar
Ellis, J.; Fee, C.; and Thomas, S.. “Playing Favorites? Industry Expert Directors in Diversified Firms.” Journal of Financial and Quantitative Analysis, 53 (2018), 1679–1714.10.1017/S0022109018000169CrossRefGoogle Scholar
Fahlenbrach, R.; Minton, B.; and Pan, C.. “Former CEO Directors: Lingering CEOs or Valuable Resources?” Review of Financial Studies, 24 (2011), 3486–3518.10.1093/rfs/hhr056CrossRefGoogle Scholar
Fama, E. F., and French, K.. “Common Risk Factors in the Returns on Stocks and Bonds.” Journal of Financial Economics, 33 (1993), 3–56.10.1016/0304-405X(93)90023-5CrossRefGoogle Scholar
Fama, E. F., and Jensen, M.. “Separation of Ownership and Control.” Journal of Law and Economics, 26 (1983), 301–325.10.1086/467037CrossRefGoogle Scholar
Fazio, R. H.; Zanna, M. P.; and Cooper, J.. “Direct Experience and Attitude Behavior Consistency: An Information Processing Analysis.” Personality and Social Psychology Bulletin, 4 (1978), 48–51.CrossRefGoogle Scholar
Fee, C. E., and Hadlock, C. J.. “Raids, Rewards, and Reputations in the Market for Managerial Talent.” Review of Financial Studies, 16 (2003), 1315–1357.10.1093/rfs/hhg031CrossRefGoogle Scholar
Fee, C. E.; Hadlock, C. J.; and Pierce, J. R.. “Managers With and Without Style: Evidence Using Exogenous Variation.” Review of Financial Studies, 26 (2013), 567–601.10.1093/rfs/hhs131CrossRefGoogle Scholar
Field, L. C., and Mkrtchyan, A.. “The Effect of Director Experience on Acquisition Performance,” Journal of Financial Economics, 123 (2017), 488–511.CrossRefGoogle Scholar
Fos, V.; Li, K.; and Tsoutsoura, M.. “Do Director Elections Matter?” Review of Financial Studies, 31 (2018), 1499–1531.10.1093/rfs/hhx078CrossRefGoogle Scholar
Fracassi, C., and Tate, G.. “External Networking and Internal Firm Governance.” Journal of Finance, 67 (2012), 153–194.10.1111/j.1540-6261.2011.01706.xCrossRefGoogle Scholar
Gao, H.; Harford, J.; and Li, K.. “CEO Turnover-Performance Sensitivity in Private Firms.” Journal of Financial and Quantitative Analysis, 52 (2017), 583–611.10.1017/S0022109017000126CrossRefGoogle Scholar
Giannetti, M.; Liao, G.; and Yu, X.. “The Brain Gain of Corporate Boards: Evidence from China.” Journal of Finance, 70 (2015), 1629–1682.10.1111/jofi.12198CrossRefGoogle Scholar
Grossman, S. J.; Kihlstrom, R. E.; and Mirman, L. J.. “A Bayesian Approach to the Production of Information and Learning by Doing.” Review of Economic Studies, 44 (1977), 533–547.CrossRefGoogle Scholar
Guner, A. B; Malmendier, U.; and Tate, G.. “Financial Expertise of Directors.” Journal of Financial Economics, 88 (2008), 323–354.10.1016/j.jfineco.2007.05.009CrossRefGoogle Scholar
Guo, L., and Masulis, R.. “Board Structure and Monitoring: New Evidence from CEO Turnovers.” Review of Financial Studies, 28 (2015), 2770–2881.10.1093/rfs/hhv038CrossRefGoogle Scholar
Harford, J. “Takeover Bids and Target Directors’ Incentives: The Impact of a Bid on Directors’ Wealth and Board Seats.” Journal of Financial Economics, 69 (2003), 51–83.10.1016/S0304-405X(03)00108-9CrossRefGoogle Scholar
Harford, J., and Schonlau, R.. “Does the Director Labor Market Offer Ex-Post Settling Up for CEOs? The Case of Acquisitions.” Journal of Financial Economics, 110 (2013), 18–36.10.1016/j.jfineco.2013.04.013CrossRefGoogle Scholar
Hazarika, S.; Karpoff, J. M.; and Nahata, R.. “Internal Corporate Governance, CEO Turnover and Earnings Management.” Journal of Financial Economics, 104 (2012), 44–69.10.1016/j.jfineco.2011.10.011CrossRefGoogle Scholar
Hermalin, B., and Weisbach, M.. “Endogenously Chosen Board of Directors and Their Monitoring of the CEO.” American Economic Review, 88 (1998), 96–118.Google Scholar
Hermalin, B., and Weisbach, M.. “Boards of Directors as an Endogenously Determined Institution: A Survey of the Economic Literature.” Economic Policy Review, 9 (2003), 7–26.Google Scholar
Huang, Q.; Jiang, F.; Lie, E.; and Yang, K.. “The Role of Investment Banker Directors in M&A.” Journal of Financial Economics, 112 (2014), 269–286.CrossRefGoogle Scholar
Huson, M.; Malatesta, P.; and Parrino, R.. “Managerial Succession and Firm Performance.” Journal of Financial Economics, 74 (2004), 237–275.10.1016/j.jfineco.2003.08.002CrossRefGoogle Scholar
Huson, M.; Parrino, R.; and Starks, L.. “Internal Monitoring Mechanisms and CEO Turnover: A Long-Term Perspective.” Journal of Finance, 56 (2001), 2265–2297.10.1111/0022-1082.00405CrossRefGoogle Scholar
Hwang, B., and Kim, S.. “It Pays to Have Friends.” Journal of Financial Economics, 93 (2009), 138–158.10.1016/j.jfineco.2008.07.005CrossRefGoogle Scholar
Iverson, B.; Madsen, J.; Wang, W.; and Xu, Q.. “Financial Costs of Judicial Inexperience.” Working Paper, available at https://ssrn.com/abstract=3084318 (2018).Google Scholar
Jenter, D., and Kanaan, F.. “CEO Turnover and Relative Performance Evaluation.” Journal of Finance, 70 (2015), 2155–2183.10.1111/jofi.12282CrossRefGoogle Scholar
Jenter, D., and Lewellen, K.. “Performance-Induced CEO Turnover.” Working Paper, Stanford University (2014).Google Scholar
Jiang, W.; Wan, H.; and Zhao, S.. “Reputation Concerns of Independent Directors: Evidence from Individual Director Voting.” Review of Financial Studies, 29 (2016), 655–696.Google Scholar
Kaplan, S., and Minton, B. A.. “How Has CEO Turnover Changed?” International Review of Finance, 12 (2011), 57–87.10.1111/j.1468-2443.2011.01135.xCrossRefGoogle Scholar
Kaustia, M., and Knupfer, S.. “Do Investors Overweight Personal Experience? Evidence from IPO Subscriptions.” Journal of Finance, 63 (2008), 2679–2702.CrossRefGoogle Scholar
Kempf, E.; Manconi, A.; and Spalt, O.. “Learning by Doing: The Value of Experience and the Origins of Skill for Mutual Fund Managers.” Working Paper, Tilburg University (2016).Google Scholar
Khurana, R., and Nohria, N.. “The Performance Consequences of CEO Turnover.” Working Paper, Harvard Business School (2000).10.2139/ssrn.219129CrossRefGoogle Scholar
Lel, U., and Miller, D. P.. “International Cross-Listing, Firm Performance and Top Management Turnover: A Test of the Bonding Hypothesis.” Journal of Finance, 63 (2008), 1897–1937.CrossRefGoogle Scholar
Masulis, R. W., and Mobbs, S.. “Independent Director Incentives: Where Do Talented Directors Spend Their Limited Time and Energy?” Journal of Financial Economics, 111 (2014), 406–429.CrossRefGoogle Scholar
Mikhail, M. B.; Walther, B. R.; and Willis, R. H.. “Do Security Analysts Improve Their Performance with Experience?” Journal of Accounting Research, 35 (1997), 120–131.10.2307/2491458CrossRefGoogle Scholar
Mikhail, M. B.; Walther, B. R.; and Willis, R. H.. “The Effect of Experience on Security Analyst Underreaction.” Journal of Accounting and Economics, 35 (2003), 101–116.CrossRefGoogle Scholar
Milbourn, T. T. “CEO Reputation and Stock-Based Compensation.” Journal of Financial Economics, 68 (2003), 233–262.CrossRefGoogle Scholar
Mobbs, S. “CEOs Under Fire: The Effects of Competition from Inside Directors on Forced CEO Turnover and CEO Compensation.” Journal of Financial and Quantitative Analysis, 48 (2013), 669–698.10.1017/S0022109013000318CrossRefGoogle Scholar
Nisbett, R., and Ross, L.. Human Inference: Strategies and Shortcomings of Social Judgment. Englewood Cliffs, NJ: Prentice Hall (1980).Google Scholar
Parrino, R. “CEO Turnover and Outside Succession: A Cross-Sectional Analysis.” Journal of Financial Economics, 46 (1997), 165–197.10.1016/S0304-405X(97)00028-7CrossRefGoogle Scholar
Roth, A. E., and Erev, I.. “Learning in Extensive-Form Games: Experimental Data and Simple Dynamic Models in the Intermediate Term.” Games and Economic Behavior, 8 (1995), 164–212.CrossRefGoogle Scholar
Seru, A.; Shumway, T.; and Stoffman, N.. “Learning by Trading.” Review of Financial Studies, 23 (2009), 705–739.CrossRefGoogle Scholar
Shivdasani, A., and Yermack, D.. “CEO Involvement in the Selection of New Board Members: An Empirical Analysis.” Journal of Finance, 54 (1999), 1829–1853.CrossRefGoogle Scholar
Vancil, R. Passing the Baton: Managing the Process of CEO Succession. Boston, MA: Harvard Business School Press (1987).Google Scholar
Wang, C.; Xie, F.; and Zhu, M.. “Industry Expertise of Independent Directors and Board Monitoring.” Journal of Financial and Quantitative Analysis, 50 (2015), 929–962.CrossRefGoogle Scholar
Warner, J.; Watts, R.; and Wruck, K.. “Stock Prices and Top Management Changes.” Journal of Financial Economics, 20 (1988), 461–492.CrossRefGoogle Scholar
Weisbach, M. “Outside Directors and CEO Turnover.” Journal of Financial Economics, 20 (1988), 431–460.CrossRefGoogle Scholar
White, H. “A Heteroskedasticity-Consistent Covariance Matrix Estimator and a Direct Test of Heteroskedasticity.” Econometrica, 48 (1980), 817–838.CrossRefGoogle Scholar
Yermack, D. “Higher Market Valuation of Companies with a Small Board of Directors.” Journal of Financial Economics, 40 (1996), 185–211.10.1016/0304-405X(95)00844-5CrossRefGoogle Scholar
Supplementary material: PDF

Ellis et al. supplementary material

Tables A1-A2

Download Ellis et al. supplementary material(PDF)
PDF 78.9 KB