Is the "bottom line" the bottom line? The determinants of CEO forced exit

Abstract

The linkage between poor firm performance and CEO dismissal has not been consistently demonstrated in prior research, leading to calls to explore factors that moderate this relationship. In an industry-matched sample of firms from the Business Week 1000 that dismiss their CEO and those that don't, we examine the relationship between different measures of firm performance and dismissal, as well as the power of the CEO, board and shareholders to moderate this relationship. We find that CEO succession is related to stock returns, changes in profitability, and debt downgrading, but not to earnings expectations. Further, CEOs use their power to resist exit under all circumstances, while boards and institutional investors exercise their power to force out the CEO only when performance is poor.