Management Accounting Section Midyear Meeting

How Much Do Recessions Reveal About CEO Ability? Evidence From CEO Turnover

• In Event: CEO Behavior

Abstract

I investigate CEO turnover decisions to study whether corporate boards learn more about CEO ability in recessions than in booms. To derive predictions, I extend the standard learning model and assume that CEO ability is more beneficial in recessions than booms. I test my predictions in a U.S. sample from 1993 to 2018. Consistent with my hypotheses, I find, first, that the turnover-performance relationship decreases more strongly after recessions than after booms. Second, the CEO’s performance in recessions more strongly decreases the future dismissal risk than the performance in booms. These effects are more pronounced if stock returns are less volatile and recessions are more severe. Finally, drawing on proxies for CEO ability, I provide additional evidence that the dismissal risk for weak ability CEOs is particularly high in recessions. My findings help to explain why boards are more likely to dismiss CEOs when industry performance is weak. The results suggest that boards do not misattribute weak industry performance to CEOs but consider recession performance particularly informative about CEO abilities.

Author

• Peter Schaefer, Technische Universität München