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Governance and CEO Turnover: Do Something or Do the Right Thing?

Raymond Fisman, Rakesh Khurana (), Matthew Rhodes-Kropf () and Soojin Yim ()
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Rakesh Khurana: Harvard Business School, Boston, Massachusetts 02163
Soojin Yim: Goizueta Business School, Emory University, Atlanta, Georgia 30322

Management Science, 2014, vol. 60, issue 2, 319-337

Abstract: We study how corporate governance affects firm value through the decision of whether to fire or retain the chief executive officer (CEO). We present a model in which weak governance---which prevents shareholders from controlling the board---protects inferior CEOs from dismissal, while at the same time insulates the board from pressures by biased or uninformed shareholders. Whether stronger governance improves retain/replace decisions depends on which of these effects dominates. We use our theoretical framework to assess the effect of governance on the quality of firing and hiring decisions using data on the CEO dismissals of large U.S. corporations during 1994--2007. Our findings are most consistent with a beneficent effect of weak governance on CEO dismissal decisions, suggesting that insulation from shareholder pressure may allow for better long-term decision making. This paper was accepted by Brad Barber, finance.

Keywords: corporate finance; management; organizational studies; decision making; CEO turnover; governance; entrenchment; entrenched CEOs (search for similar items in EconPapers)
Date: 2014
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