Contagion Effects of CEO Turnover: Evidence from Firm-CEO Mismatches

• In Event: Doctoral Student Faculty Interchange I

Abstract

The competitive assignment model of Eisfeldt and Kuhnen (2013), wherein CEOs are matched
with firm demands determined by the industry, suggests that when industry conditions evolve and
create a firm-CEO skillset disparity, forced turnover becomes more likely. Motivated by this
theory, we examine and find that forced CEO turnover announcements that signal a firm-CEO
mismatch shock in the industry, have news content not only for the affected firm, but also for its
industry peers. This effect does not exist when the forced turnover is unlikely to signal a mismatch
that is industry-relevant, which alleviates the concern that the results are driven by general comovements of related stocks. We further show that investors of industry peers react more
negatively when the turnover firms replace their CEO externally and when the turnover firms are
industry leading, bellwether firms, implying a higher relevance of such announcements for the
industry. A placebo test matching turnover firms with non-peer firms reveals that the effect only
exists for the turnover firms’ true peers. Our results are also robust to alternative measures of
abnormal returns, controls for overall industry performance, and different identifications of peer
firms. This paper is the first to show that an ostensibly firm-specific event, such as a CEO turnover,
could indicate discernible industry-wide implications for firms beyond the affected firm.

Authors

• Maya A. Thevenot, Florida Atlantic University - Boca

• Rosemond Desir, Florida Atlantic University

• Scott E Seavey, Florida Atlantic University