Turnover in top management and de-escalation of commitment

Dmitriy Chulkov and John M. Barron

Applied Economics, 2019, vol. 51, issue 23, 2534-2551

Abstract: We explore how de-escalation of commitment is linked to top management turnover and economic changes at the firm. Escalation of commitment occurs when managers continue investment in a project after receiving negative information. A major determinant of escalation is the personal responsibility effect in that managers are more likely to escalate commitment to a failing project if they were responsible for the original investments. Prior studies suggest that a change in top management facilitates de-escalation of commitment as incoming managers who do not have such commitment are able to stop investments that are discovered to be failing. Our empirical analysis based on a sample of over 3,300 firms for the period from 1992 to 2016 demonstrates the link between specific top management turnover types and economic changes at the firm consistent with the de-escalation of commitment.

Date: 2019
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DOI: 10.1080/00036846.2018.1546955

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