Sex, drugs, and. .. financial restatements? Investigating differences in firms’ CEO dismissal and succession actions post-misconduct

Abstract

To mitigate the potential adverse effects of corporate misconduct, firms often dismiss the chief executive officer (CEO) and appoint an outsider. Such actions are commonly interpreted as signals of firms’ commitment to reducing the likelihood of future misconduct. However, empirical findings linking misconduct to CEO turnover remain inconsistent. We argue that this inconsistency stems from a general neglect of nuances in both the nature of misconduct and directors’ oversight roles. We theorize that variation in CEO attribution based on misconduct type and firm performance helps explain these dismissal and appointment decisions. We test our arguments by distinguishing between two types of misconduct—CEO personal misconduct, where attribution is higher, and firm-level financial misconduct, where attribution is lower. Analyzing 59 CEO personal misconduct events matched by industry, firm size, and time period to 324 financial misconduct events, we find that these dismissal and appointment decisions are shaped by misconduct type, with firm performance moderating these relationships.