Two Essays on CEO Turnover


Student thesis: Doctoral Thesis

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Award date16 Jun 2017


Previous studies of CEO turnover mainly focus on the departure of firms' outgoing CEOs and characteristics of their incoming CEOs. As firms usually do not disclose their candidate search and identification process, few researches focus on the search process and interim period during CEO transition. Using hand-collected data of listed U.S. firms, this thesis provides new empirical findings regarding searching and identification process during CEO turnover.

Two essays are included in this thesis. The first essay takes an insightful view on the interim period during CEO successions and studies the event of the promotion of interim CEOs to formal CEO position. Previous literatures in finance do not take a thorough investigation into the interim period during CEO succession. Studies in management posit that firms' board treat their interim CEOs as viable CEO candidates but they do not have fully confidence on those candidates' leadership qualifications. Thus, firms' board use interim period and search process to "try-out" those candidates' leadership credential. This essay empirically examine the "try-out" argument. Empirical results provide supportive evidences to the "try-out" argument. I find that firms using interim CEO are less likely to have heir apparent, suggesting a lack of qualified CEO contender. In addition, interim CEOs' likelihood of being promoted to formal CEO position increases as the increase of interim period firm performance. Further empirical analyses suggest that deteriorations of long-term firm performance resulted from "leadership vacuum" during the interim period are conditional on the outcomes of the try-out process. firms who promoted their interim CEOs experience an enhancement of long-term firm performance and a high quality of CEO-firm matching. While negative effects of "leadership vacuum" mainly comes from firms whose interim CEOs failed the "try-our" process.

The second essay studies signing bonus in CEOs' initial compensation contract. firms could issue cash or equity to executives as signing bonus. Optimal contracting theory suggests that equity compensation could align CEOs' wealth with shareholder's interests and reduce agency problem. However, in reality, firms are apt to pay lump-sum cash as signing bonus. This essays studies the rationality of the use of cash signing bonus from a perspective of labor market conditions. I find that the use of cash signing bonus is rational with specific function. In detail, the likelihood of issuing cash signing bonus and the amount of cash signing bonus are positively correlated with CEOs' outside job opportunities and are negatively correlated with firms alternative choices. Empirical finds suggest that the payment of cash signing bonus are stem from labor market conditions during the searching period. Using cash signing bonus enables firms to beat other rivals in the labor market and to attract qualified candidates that are demanding in the market.