The Impact of Earnings Volatility on CEO Turnover

• In Event: Financial Accounting and Reporting IV

Abstract

I examine the relationship between earnings volatility and forced CEO turnover. Employing hazard analyses, I find that forced CEO turnover occurs at a higher rate when earnings volatility is high. Furthermore, I find that CEO turnover occurs at a lower rate when the earnings stream is smooth relative to a volatile cash flow. This suggests that the accrual process may be used to lengthen a CEO’s tenure if the firm’s underlying cash flows are volatile. Finally, I find that successor CEOs report lower levels of earnings volatility than their predecessors who were involuntarily terminated, indicating that successor CEOs appear to be aware that earnings volatility may have contributed to their predecessors’ terminations and wish to avoid the same fate.

Author

• Kenneth Ray House, Indiana University - Bloomington