Ceo Turnover and Relative Performance

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Ceo Turnover and Relative Performance

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NBER WORKING PAPER SERIES

CEO TURNOVER AND RELATIVE PERFORMANCE EVALUATION Dirk Jenter Fadi Kanaan Working Paper 12068 http://www.nber.org/papers/w12068 NATIONAL BUREAU OF ECONOMIC RESEARCH 1050 Massachusetts Avenue Cambridge, MA 02138 February 2006

We thank Nittai Bergman, Robert Gibbons, David McAdams, Andrew Bernard, François Degeorge, Diego Garcia, Rafael LaPorta, Jonathan Lewellen, Katharina Lewellen, Kalina Manova, Antoinette Schoar, Karin Thorburn, Joel Vanden, Eric Van den Steen, Kent Womack, and seminar participants at MIT Sloan, the University of Illinois at Urbana-Champaign, and the Tuck School of Business at Dartmouth for their comments and suggestions. All remaining errors are our own. The views expressed herein are those of the author(s) and do not necessarily reflect the views of the National Bureau of Economic Research. ©2006 by Dirk Jenter and Fadi Kanaan. All rights reserved. Short sections of text, not to exceed two paragraphs, may be quoted without explicit permission provided that full credit, including © notice, is given to the source.

CEO Turnover and Relative Performance Evaluation Dirk Jenter and Fadi Kanaan NBER Working Paper No. 12068 February 2006 JEL No. G30, G34, D20, D23, M51 ABSTRACT This paper examines whether CEOs are fired after bad firm performance caused by factors beyond their control. Standard economic theory predicts that corporate boards filter out exogenous industry and market shocks to firm performance when deciding on CEO retention. Using a new handcollected sample of 1,590 CEO turnovers from 1993 to 2001, we document that CEOs are significantly more likely to be dismissed from their jobs after bad industry and bad market performance. A decline in the industry component of firm performance from its 75th to its 25th percentile increases the probability of a forced CEO turnover by approximately 50 percent. This finding is robust to controls for firm-specific performance. The result is at odds with the prior...

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