CEO turnover in a competitive assignment framework

Eisfeldt, Andrea and Kuhnen, Camelia M. (2010): CEO turnover in a competitive assignment framework.

Abstract

There is considerable and widespread concern about whether CEOs are appropriately punished for poor performance. The empirical literature on CEO turnover documents that CEOs are indeed more likely to be forced out if their performance is poor relative to the industry average. However, CEOs are also more likely to be replaced if the industry is doing badly. We show that these empirical patterns are natural and efficient outcomes of a competitive assignment model in which CEOs and firms form matches based on multiple characteristics, and where industry conditions affect the outside options of both managers and firms. Our model also has several new predictions about the type of replacement manager, and their pay and performance. We construct a dataset which describes all turnover events during the period 1992-2006 and show that these predictions are also born out empirically.

• Item Type: MPRA Paper
• Language: English
• Keywords: Executive Turnover; Matching Models; Competitive Assignment; CEO Labor Market
• Subjects: J - Labor and Demographic Economics > J4 - Particular Labor Markets > J41 - Labor Contracts; J - Labor and Demographic Economics > J6 - Mobility, Unemployment, Vacancies, and Immigrant Workers > J63 - Turnover ; Vacancies ; Layoffs; J - Labor and Demographic Economics > J3 - Wages, Compensation, and Labor Costs > J31 - Wage Level and Structure ; Wage Differentials; J - Labor and Demographic Economics > J4 - Particular Labor Markets > J44 - Professional Labor Markets ; Occupational Licensing; M - Business Administration and Business Economics ; Marketing ; Accounting ; Personnel Economics > M5 - Personnel Economics > M51 - Firm Employment Decisions ; Promotions; G - Financial Economics > G3 - Corporate Finance and Governance > G30 - General

References

Allgood, S. and K. A. Farrell (2003). The match between CEO and firm. Journal of Business 76 (2), 317–341.

Barro, J. R. and R. J. Barro (1990, October). Pay, performance and turnover of bank CEOs. Journal of Labor Economics 8 (4), 448–481.

Bebchuk, L. and J. Fried (2004). Pay without Performance. Cambridge, MA and London, England: Harvard University Press.

Bertrand, M. and A. Schoar (2003, November). Managing with style: The effect of managers on firm policies. Quarterly Journal of Economics 118 (4), 1169:1208.

DeMarzo, P., M. Fishman, Z. He, and N. Wang (2009). Dynamic agency and the q theory of investment. Working paper .

DeMarzo, P. M. and M. J. Fishman (2007a, January). Agency and optimal investment dynamics. Review of Financial Studies 20, 151–188.

DeMarzo, P. M. and M. J. Fishman (2007b, November). Optimal long-term financial contracting. Review of Financial Studies 20, 2079–2128.

Dicks, D. (2009). Executive Compensation, Incentives, and the Role for Corporate Governance Regulation. Working paper, UNC.

Edmans, A. and X. Gabaix (2009). Is CEO pay really inefficient? A survey of new optimal contracting theories. European Financial Management 15 (3), 486–496.

Eisfeldt, A. and A. Rampini (2008). Managerial incentives, capital reallocation, and the business cycle. Journal of Financial Economics, 177–199.

Frydman, C. (2005). Rising Through the Ranks: The Evolution of the Market for Corporate Executives, 1936-2003. Harvard University, Working Paper .

Gabaix, X. and A. Landier (2008). Why Has CEO Pay Increased So Much? Quarterly Journal of Economics 123 (1), 49–100.

Giannetti, M. (2009). Serial CEO incentives and the structure of managerial contracts. Working paper .

Gibbons, R. and K. J. Murphy (1990, February). Relative performance evaluation for Chief Executive Officers. Industrial and Labor Relations Review 43 (3. Special issue: Do Compensation Policies Matter?), 30S–51S.

Graham, J., C. R. Harvey, and M. Puri (2009). Managerial attitudes and corporate actions. Working paper .

He, Z. (2007). Dynamic compensation contracts with private savings. Working paper .

He, Z. (2009). A model of dynamic compensation and capital structure. Working paper .

Holmstrom, B. (1982). Moral Hazard in Teams. The Bell Journal of Economics 13 (2), 324–340.

Huson, M. R., P. H. Malatesta, and R. Parrino (2004). Managerial succession and firm performance. Journal of Financial Economics, 237–275.

Huson, M. R., R. Parrino, and L. Starks (2001, December). Internal monitoring mechanisms and CEO turnover: A long-term perspective. Journal of Finance 56 (6).

Jenter, D. and F. Kanaan (2006, February). CEO turnover and relative performance evaluation. Working paper, MIT.

Kaplan, S., M. M. Klebanov, and M. Sorensen (2008, August). Which CEO characteristics and abilities matter? Working paper .

Kaplan, S. and B. A. Minton (2006, August). How has CEO turnover changed? Increasingly performance sensitive boards and increasingly uneasy CEOs. NBER Working paper 12465 .

Kaplan, S. N. and J. D. Rauh (2010). Wall Street and Main Street: What Contributes to the Rise in the Highest Incomes? Review of Financial Studies 23 (3), 1004–1050.

Lancaster, K. J. (1966). A New Approach to Consumer Theory. Journal of Political Economy 74, 132–156.

Lazear, E. P. and P. Oyer (2004). Internal and external labor markets: a personnel economics approach. Labour Economics 11, 527–554.

Lucas, Robert E., J. (1978). On the Size Distribution of Business Firms. Bell Journal of Economics 9, 508–523.

Lustig, H., C. Syverson, and S. Van Nieuwerburgh (2009). Technological change and the growing inequality in managerial compensation. NBER Working Paper 14661 .

Murphy, K. J. (1999). Executive Compensation. Handbook of Labor Economics 3.

Murphy, K. J. and J. Zabojnik (2004). CEO Pay and Appointments: A Market-based explanation for recent trends. American Economic Review Papers and Proceedings 94(2), 192–196.

Murphy, K. J. and J. Zabojnik (2007, April). Managerial capital and the market for CEOs. Working paper .

Oyer, P. (2004, August). Why Do Firms Use Incentives That Have No Incentive Effects? Journal of Finance 49 (4), 1619–1649.

Parrino, R. (1997). CEO turnover and outside succession. Journal of Financial Economics 46, 165–197.

Peters, F. S. and A. F. Wagner (2007, December). The executive turnover risk premium. Working paper .

Rosen, S. (1974). Hedonic prices and implicit markets. Journal of Political Economy 82, 34–35.

Rosen, S. (1981). The economics of superstars. American Economic Review 71, 845–858.

Sannikov, Y. (2008, July). A continuous-time version of the principal-agent problem. Review of Economic Studies 75 (3), 957–984.

Sattinger, M. (1979). Differential rents and the distribution of earnings. Oxford Economics Papers 31 (1), 60–71.

Sattinger, M. (1993). Assignment Models of the Distribution of Earnings. Journal of Economic Literature 31, 831–880.

Tervio, M. (2008). The Difference That CEOs Make: An Assignment Model Approach. American Economic Review 98 (3), 642–668.

Warner, J., R.Watts, and K.Wruck (1988). Stock prices and top management changes. Journal of Financial Economics 20, 461–492.