Date of Award
Olin Business School
Doctor of Philosophy (PhD)
Chapter 1 deviates from the conventional practice by highlighting an alternative to forced CEO turnover. An interesting puzzle in corporate finance is the week sensitivity of disciplinary action against CEO to poor firm performance. I show that this weak relation is in part driven by an overlooked alternative to firing, which in practice takes the form of splitting the CEO-Chairman role or demoting the incumbent CEO to the executive Chairman position. I first document that such demotions are a frequently used alternative disciplinary mechanism, accounting for nearly 40% of all involuntary CEO transitions. I further show that the use of this mechanism is concentrated among firms in which the CEO is most entrenched or the cost of firing its CEO is high, i.e. CEOs with firm or industry-specific managerial skills and those with strong long-term performance and weak governance. Market reactions to CEO demotions are positive, on average. Finally, I show that classifying CEO demotions as an alternative form of involuntary turnover magnifies the sensitivity of involuntary turnover to firm performance and eliminates the relation between performance and voluntary turnover.
In chapter 2, we examine the role of deferred vesting of stock and option grants in reducing executive turnover. To the extent an executive forfeits all unvested stock and option grants if she leaves the firm, deferred vesting will increase the cost (to the executive) of early exit. Using pay Duration proposed in Gopalan, et al., (forthcoming) as a measure of the length of managerial pay, we find that CEOs and non-CEO executives with longer pay Duration are less likely to leave the firm voluntarily. Employing the vesting of a large prior-year stock/option grant as an instrument for Duration, we find the effect to be causal. CEOs with longer pay Duration are also less likely to experience a forced turnover and the sensitivity of forced CEO turnover to firm performance is significantly lower in firms that offer longer duration pay. Overall, our study highlights a strong link between compensation design and turnover for top executives.
Finally, in chapter 3, we develop and test a new explanation for forced CEO turnover. Investors may disagree with management on the optimal course of corporate actions due to heterogeneous prior beliefs. Such disagreement may be persistent and costly to firms, and thus create incentives for firms to replace CEOs who investors tend to disagree with. We use this logic to develop and provide evidence for three hypotheses. First, firms with higher investor-management disagreement are more likely to fire their CEOs, and this effect is more pronounced in more-financially-constrained firms as well as those with less-entrenched CEOs and stronger shareholder governance. Second, firms are more likely to hire an external CEO as a successor if investor-management disagreement with the departing CEO is higher. Third, investor-management disagreement declines following forced CEO turnover. Thus, the evidence sheds new light on how disagreement between management and investors shapes one important aspect of corporate governance--the replacement of CEOs.
Chair and Committee
Anjan V Thakor
Anjan V Thakor, Radhakrishnan Gopalan, Mark T Leary, John H Nachbar, Todd T Milbourn
Maharjan, Johan, "Essays on Executive Turnover" (2015). Arts & Sciences Electronic Theses and Dissertations. 419.