The use and effectiveness of top executive dismissal

Abstract

We provide a systematic assessment of the empirical evidence on the use and effectiveness of top executive dismissal as a governance and performance improvement mechanism. Our results suggest that poor individual and firm performance significantly increase the likelihood of executive dismissal. A strong power base might help under-performing top executives to extend their tenure in office, but effective ownership and governance structures can provide a counterweight to such entrenchment behaviors. However, our review casts doubt on the effectiveness of top executive dismissal as a means to enhance future firm performance: employing meta-analytical techniques we show that, although the dismissal announcement leads to positive abnormal returns, it has no significant effect on long-term measures of firm performance. On the basis of our findings, we develop a conceptual model of the possible antecedents and consequences of top executive dismissal. We derive implications for boards involved in situations of executive dismissal and for the successors of dismissed executives, and we provide directions for future leadership research on executive dismissal. © 2012 Elsevier Inc.