Open AccessJournal Article10.1086/209656

The Consequences of Forced CEO Succession for Outside Directors

- 01 Oct 2000

- Vol. 73, Iss: 4, pp 597-627

206

TL;DR: This article found that outside directors who are not aligned with the CEO and own relatively large equity stakes are rewarded when they remove a poorly performing CEO and replace him or her with a CEO that improves firm performance.

Abstract: We find an increased likelihood of outside director turnover following forced CEO succession, especially among those directors that are closely aligned with the outgoing CEO, own little equity, and make poor replacement decisions. Directors that remain on the board, however, are more likely to acquire new directorships than those that remain on the board of a matched- sample firm. Overall, the results suggest that outside directors who are not aligned with the CEO and own relatively large equity stakes are rewarded when they remove a poorly performing CEO and replace him or her with a CEO that improves firm performance. Copyright 2000 by University of Chicago Press.

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Most frequently asked questions

1. What have the authors contributed in "The consequences of forced ceo succession for outside directors" ?

In this paper, the determinants of whether a board member leaves the board in the 4-year period following forced CEO turnover were examined.

2. How do the authors determine whether the results are sensitive to differences in preturnover performance?

To determine whether their results are sensitive to differences in preturnover performance, the authors reestimated equation (1) using the matched sample firms that performed poorly (worse than the market) during the 2-year preturnover period and their corresponding forced-turnover firms.

3. How do the authors determine whether a firm’s CEO was forced or voluntary?

By reading the Wall Street Journal announcement about the turnover, the authors determine whether the turnover was forced or voluntary in nature.

TABLE 1 Means and Tests for Differences in the Firms with Forced CEO Turnover and Matched Firms

TABLE 5 Changes in Directorships Held by Outside Directors of 66 Firms Experiencing Forced CEO Turnover and 66 Matched Firms that Do Not Experience Forced CEO Turnover

Citations

•Posted Content

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References

Journal Article•10.1086/467037

Separation of ownership and control

Eugene F. Fama, +1 more

- 01 Jun 1983

- The Journal of Law and Economics

TL;DR: The authors argue that the separation of decision and risk-bearing functions observed in large corporations is common to other organizations such as large professional partnerships, financial mutuals, and nonprofits. But they do not consider the role of decision agents in these organizations.

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Agency Problems and the Theory of the Firm

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TL;DR: In this article, the authors explain how the separation of security ownership and control, typical of large corporations, can be an efficient form of economic organization, and set aside the presumption that a corporation has owners in any meaningful sense.

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The Modern Industrial Revolution, Exit, and the Failure of Internal Control Systems

Michael C. Jensen

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TL;DR: The last two decades indicate corporate internal control systems have failed to deal effectively with these changes, especially slow growth and the requirement for exit as mentioned in this paper, which is a major challenge for Western firms and political systems as these forces continue to work their way through the worldwide economy.

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- 01 Feb 1996

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Michael S. Weisbach

- 01 Jan 1988

- Journal of Financial Economics

TL;DR: This article examined the relation between the monitoring of CEOs by inside and outside directors and CEO resignations using stock returns and earnings changes as measures of prior performance, and found that there is a stronger association between prior performance and the probability of a resignation.

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The Consequences of Forced CEO Succession for Outside Directors

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Most frequently asked questions

1. What have the authors contributed in "The consequences of forced ceo succession for outside directors" ?

2. How do the authors determine whether the results are sensitive to differences in preturnover performance?

3. How do the authors determine whether a firm’s CEO was forced or voluntary?

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Citations

Boards of Directors as an Endogenously Determined Institution: A Survey of the Economic Literature

Boards of Directors as an Endogenously Determined Institution: A Survey of the Economic Literature

Boards of Directors as an Endogenously Determined Institution: A Survey of the Economic Literature

Additions to corporate boards: the effect of gender

Consequences of Financial Reporting Failure for Outside Directors: Evidence from Accounting Restatements and Audit Committee Members

References

Separation of ownership and control

Agency Problems and the Theory of the Firm

The Modern Industrial Revolution, Exit, and the Failure of Internal Control Systems

Higher market valuation of companies with a small board of directors

Outside directors and CEO turnover

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