Hostname: page-component-848d4c4894-v5vhk Total loading time: 0 Render date: 2024-06-29T19:53:31.433Z Has data issue: false hasContentIssue false
  • English
  • Français

CEO Turnover and Volatility under Long-Term Employment Contracts

Published online by Cambridge University Press:  20 August 2019

Peter Cziraki Open the ORCID record for Peter Cziraki [Opens in a new window]  and
Moqi Groen-Xu
Peter Cziraki*
Affiliation:
Cziraki, peter.cziraki@utoronto.ca, University of Toronto Department of Economics
Moqi Groen-Xu
Affiliation:
Groen-Xu, m.xu1@lse.ac.uk, London School of Economics Department of Finance
*
Cziraki (corresponding author), peter.cziraki@utoronto.ca
Get access Rights & Permissions [Opens in a new window]

Abstract

We study the role of the contractual time horizon of chief executive officers (CEOs) for CEO turnover and corporate policies. Using hand-collected data on 3,954 fixed-term CEO contracts, we show that remaining time under contract predicts CEO turnover. When contracts are close to expiration, turnover is more likely and is more sensitive to performance. We also show a positive within-CEO relation between remaining time under contract and firm risk. Our results are similar across short and long contracts and are driven neither by firm or CEO survival, nor technological cycles. They are consistent with incentives to take long-term projects with interim volatility.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 55 , Issue 6 , September 2020 , pp. 1757 - 1791
Copyright
Copyright © Michael G. Foster School of Business, University of Washington 2019

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

Footnotes

We are grateful to Pat Akey, David Denis, Alex Edmans, Andrew Ellul (discussant), Daniel Ferreira, Juanita Gonzalez-Uribe (discussant), Jonathan Hall, Jarrad Harford (the editor), Dirk Jenter, David Koslowsky (discussant), Katharina Lewellen (discussant), Stefan Lewellen (discussant), James S. Linck (discussant), Robert McMillan, Kevin Murphy (the referee), Daniel Paravisini, Luc Renneboog, David Robinson, Michel Serafinelli, Rui Silva, and Morten Sørensen (discussant) as well as participants at the CEAR Symposium on Corporate Control Mechanisms and Risk, the 2014 European Finance Association Meetings, the 2015 Financial Intermediation Research Society Conference, the 2016 Young Scholars Finance Consortium, the 2014 Northern Finance Association Meetings, the 2014 Warwick Business School Frontiers of Finance Conference, and seminars at the University of Geneva, University of Toronto, and York University for their comments. We also thank Steve Hillegeist, Holger Jahn, Christian Maennlin, and Jean-Luc Mauron for useful discussions on disclosure and contract design practice, and Dirk Jenter, Fadi Kanaan, Florian Peters, and Alexander Wagner for sharing their turnover data. Cziraki acknowledges financial support from CentER and TILEC at Tilburg University, from a Social Sciences and Humanities Research Council of Canada Institutional Grant, and from the National Excellence in Higher Education Program in Hungary (contract number 20765-3/2018/FEKUTSTRAT). Groen-Xu acknowledges financial support from the INSEAD Alumni Fund.

References

Aghion, P., and Jackson, M. O.. “Inducing Leaders to Take Risky Decisions: Dismissal, Tenure, and Term Limits.” American Economic Journal: Microeconomics, 8 (2016), 1–38.Google Scholar
Alesina, A.; Roubini, N.; and Cohen, G. D.. Political Cycles and the Macroeconomy. Cambridge, MA: MIT Press (1993).Google Scholar
Almazan, A., and Suarez, J.. “Entrenchment and Severance Pay in Optimal Governance Structures.” Journal of Finance, 58, 2 (2003), 519–547.CrossRefGoogle Scholar
Anderson, R.; Bustamante, M. C.; Guibaud, S.; and Zervos, M.. “Agency, Firm Growth and Managerial Turnover.” Journal of Finance, 73 (2018), 41–464.CrossRefGoogle Scholar
Antia, M.; Pantzalis, C.; and Park, J. C.. “CEO Decision Horizon and Firm Performance: An Empirical Investigation.” Journal of Corporate Finance, 16 (2010), 288–301.CrossRefGoogle Scholar
Bernile, G.; Bhagwat, V.; and Rau, P. R.. “What Doesn’t Kill You Will Only Make You More Risk-loving: Early-life Disasters and CEO Behavior.” Journal of Finance, 72 (2017), 167–206.CrossRefGoogle Scholar
Bertrand, M., and Mullainathan, S.. “Is There Discretion in Wage Setting? A Test Using Takeover Legislation.” RAND Journal of Economics, 30 (1999), 535–554.CrossRefGoogle Scholar
Bertrand, M., and Mullainathan, S.. “Enjoying the Quiet Life? Corporate Governance and Managerial Preferences.” Journal of Political Economy, 111 (2003), 1043–1075.CrossRefGoogle Scholar
Brickley, J. A.; Coles, J. L.; and Linck, J. S.. “What Happens to CEOs After They Retire? New Evidence on Career Concerns, Horizon Problems, and CEO Incentives.” Journal of Financial Economics, 52 (1999), 341–377.CrossRefGoogle Scholar
Brown, S., and Hillegeist, S. A.. “How Disclosure Quality Affects the Level of Information Asymmetry.” Review of Accounting Studies, 12 (2007), 443–477.CrossRefGoogle Scholar
Cassell, C. A; Huang, S. X.; Sanchez, J. M.; and Stuart, M. D.. “Seeking Safety: The Relation Between CEO Inside Debt Holdings and the Riskiness of Firm Investment and Financial Policies.” Journal of Financial Economics, 103 (2012), 588–610.CrossRefGoogle Scholar
Chevalier, J., and Ellison, G.. “Risk Taking by Mutual Funds as a Response to Incentives.” Journal of Political Economy, 105 (1997), 1176–1220.CrossRefGoogle Scholar
Clayton, M.; Hartzell, J.; and Rosenberg, J.. “The Impact of CEO Turnover on Equity Volatility.” Journal of Business, 78 (2005), 1779–1808.CrossRefGoogle Scholar
Coles, J. L.; Daniel, N. D.; and Naveen, L.. “Managerial Incentives and Risk Taking.” Journal of Financial Economics, 79 (2006), 431–468.CrossRefGoogle Scholar
Core, J., and Guay, W.. “Estimating the Value of Employee Stock Option Portfolios and Their Sensitivities to Price and Volatility.” Journal of Accounting Research, 40 (2002), 613–630.CrossRefGoogle Scholar
Cox, D. R.“Regression Models and Life Tables.” Journal of the Royal Statistical Society, Series B, 34 (1972), 187–220.Google Scholar
Dahiya, S., and Yermack, D.. “You Can’t Take It with You: Sunset Provisions for Equity Compensation When Managers Retire, Resign, or Die.” Journal of Corporate Finance, 14 (2008), 499–511.CrossRefGoogle Scholar
Darrough, M. N.“Managerial Incentives for Short- Term Results: A Comment.” Journal of Finance, 42 (1987), 1097–1102.CrossRefGoogle Scholar
Denis, D. J.; Denis, D. K.; and Sarin, A.. “Ownership Structure and Top Executive Turnover.” Journal of Financial Economics, 45 (1997), 193–221.CrossRefGoogle Scholar
Dittmann, I.; Maug, E.; and Spalt, O.. “Sticks or Carrots? Optimal CEO Compensation When Managers Are Loss Averse.” Journal of Finance, 65 (2010), 2015–2050.CrossRefGoogle Scholar
Edmans, A.“Short-term Termination Without Deterring Long-Term Investment: A Theory of Debt and Buyouts.” Journal of Financial Economics, 102 (2011), 81–101.CrossRefGoogle Scholar
Edmans, A.; Fang, V.; and Lewellen, K.. “Equity Vesting and Investment.” Review of Financial Studies, 30 (2017), 2229–2271.CrossRefGoogle Scholar
Edmans, A., and Liu, Q.. “Inside Debt.” Review of Finance, 15 (2011), 75–102.CrossRefGoogle Scholar
Fich, E. M., and Shivdasani, A.. “Are Busy Boards Effective Monitors? ” Journal of Finance, 61 (2006), 689–724.CrossRefGoogle Scholar
Fos, S., and Tsoutsoura, M.. “Shareholder Democracy in Play: Career Consequences of Proxy Contests.” Journal of Financial Economics, 114 (2014), 316–340.CrossRefGoogle Scholar
Garfinkel, J.; Kim, J.; and Lee, K.. “The Interactive Influence of External and Internal Governance on Risk Taking and Outcomes: The Importance of CEO Career Concerns.” Working Paper, University of Iowa (2013).CrossRefGoogle Scholar
Garmaise, M. J.“Ties that Truly Bind: Noncompetition Agreements, Executive Compensation, and Firm Investment.” Journal of Law, Economics, and Organization, 27 (2011), 376–425.CrossRefGoogle Scholar
Gillan, S. L.; Hartzell, J. C.; and Parrino, R.. “Explicit vs. Implicit Contracts: Evidence from CEO Employment Agreements.” Journal of Finance, 64 (2009), 1629–1655.CrossRefGoogle Scholar
Glover, B., and Levine, O.. “Idiosyncratic Risk and the Manager.” Journal of Financial Economics, 126 (2017), 320–341.CrossRefGoogle Scholar
Goel, A. M., and Thakor, A. V.. “Overconfidence, CEO Selection, and Corporate Governance.” Journal of Finance, 63 (2008), 2737–2784.CrossRefGoogle Scholar
Goldman, E., and Huang, P.. “Contractual versus Actual Severance Pay Following CEO Departure.” Management Science, 61 (2015), 1108–1120.CrossRefGoogle Scholar
Gompers, P.; Ishii, J.; and Metrick, A.. “Corporate Governance and Equity Prices.” Quarterly Journal of Economics, 118 (2003), 107–156.CrossRefGoogle Scholar
Gopalan, R.; Milbourn, T. T.; Song, F.; and Thakor, A. V.. “Duration of Executive Compensation.” Journal of Finance, 69 (2014), 2777–2817.CrossRefGoogle Scholar
Gormley, T. A., and Matsa, D. A.. “Growing Out of Trouble? Corporate Responses to Liability Risk.” Review of Financial Studies, 24 (2011), 2781–2821.CrossRefGoogle Scholar
Gormley, T. A., and Matsa, D. A.. “Common Errors: How to (and Not to) Control for Unobserved Heterogeneity.” Review of Financial Studies, 27 (2014), 617–661.CrossRefGoogle Scholar
Gormley, T. A., and Matsa, D. A.. “Playing It Safe? Managerial Preferences, Risk, and Agency Conflicts.” Journal of Financial Economics, 122 (2016), 431–455.CrossRefGoogle Scholar
Goyenko, R.; Ornthanalai, C.; and Tang, S.. “Trading Cost Dynamics of Market Making in Equity Options.” Working Paper, University of Toronto (2014).CrossRefGoogle Scholar
Heckman, J. J.“The Incidental Parameters Problem and the Problem of Initial Conditions in Estimating a Discrete Time-Discrete Data Stochastic Process.” In Structural Analysis of Discrete Data with Econometric Applications, Manski, C. and McFadden, D., eds. Cambridge, MA: MIT Press (1981), 179–195.Google Scholar
Hermalin, B. E., and Weisbach, M. S.. “Endogenously Chosen Boards of Directors and Their Monitoring of the CEO.” American Economic Review, (1998), 96–118.Google Scholar
Hoberg, G.; Phillips, G.; and Prabhala, N.. “Product Market Threats, Payouts, and Financial Flexibility.” Journal of Finance, 69 (2014), 293–324.CrossRefGoogle Scholar
Holmstrom, B.“Managerial Incentive Problems: A Dynamic Perspective.” In Essays in Economics and Management in Honor of Lars Wahlbeck, Helsinki: Swedish School of Economics (1982).Google Scholar
Holmstrom, B., and Ricart i Costa, J.. “Managerial Incentives and Capital Management.” Quarterly Journal of Economics, 101 (1986), 835–860.CrossRefGoogle Scholar
Hu, P.; Kale, J. R.; Pagani, M.; and Subramanian, A.. “Fund Flows, Performance, Managerial Career Concerns, and Risk-Taking.” Management Science, 57 (2011), 628–646.CrossRefGoogle Scholar
Huang, J.; Sialm, C.; and Zhang, H.. “Risk Shifting and Mutual Fund Performance.” Review of Financial Studies, 24 (2011), 2575–2616.CrossRefGoogle Scholar
Jensen, M., and Meckling, W. H.. “Theory of the Firm: Managerial Behaviour, Agency Costs and Ownership Structure.” Journal of Financial Economics, 3 (1976), 305–360.CrossRefGoogle Scholar
Jenter, D., and Kanaan, F.. “CEO Turnover and Relative Performance Evaluation.” Journal of Finance, 70 (2015), 2155–2184.CrossRefGoogle Scholar
Jenter, D., and Lewellen, K.. “CEO Preferences and Acquisitions.” Journal of Finance, 70 (2015), 2813–2852.CrossRefGoogle Scholar
Jenter, D., and Lewellen, K.. “Performance-Induced CEO Turnover.” Working Paper, London School of Economics (2017).Google Scholar
Kaplan, S. N., and Minton, B. A.. “How has CEO Turnover Changed? ” International Review of Finance, 12 (2012), 57–87.CrossRefGoogle Scholar
Kempf, A.; Ruenzi, S.; and Thiele, T.. “Employment Risk, Compensation Incentives, and Managerial Risk Taking: Evidence From the Mutual Fund Industry.” Journal of Financial Economics, 92 (2009), 91–108.CrossRefGoogle Scholar
Knoeber, C. R.“Golden Parachutes, Shark Repellents, and Hostile Tender Offers.” American Economic Review, 76 (1986), 155–167.Google Scholar
Ladika, T., and Sautner, Z.. “The Effect of Managerial Short-Termism on Corporate Investment.” Working Paper, University of Amsterdam (2018).Google Scholar
Lee, J.; Park, J.; and Folta, T.. “CEO Career Horizon, Corporate Governance, and Real Options: The Role of Economic Short-Termism.” Strategic Management Journal, 39 (2018), 2703–2725.CrossRefGoogle Scholar
Lipton, M.“Corporate Governance in the Age of Finance Corporatism.” University of Pennsylvania Law Review, 136 (1987), 1–72.CrossRefGoogle Scholar
Liu, P., and Xuan, Y.. “The Contract Year Phenomenon in the Corner Office: An Analysis of Firm Behavior During CEO Contract Renewals.” Working Paper, University of Illinois at Urbana-Champaign (2016).Google Scholar
Low, A.“Managerial Risk-Taking Behaviour and Equity-Based Compensation.” Journal of Financial Economics, 92 (2009), 470–490.CrossRefGoogle Scholar
Manso, G.“Experimentation and the Returns to Entrepreneurship.” Review of Financial Studies, 29 (2016), 2319–2340.CrossRefGoogle Scholar
Matta, E., and Beamish, P. W.. “The Accentuated CEO Career Horizon Problem: Evidence From International Acquisitions.” Strategic Management Journal, 29 (2008), 683–700.CrossRefGoogle Scholar
Mikkelson, W. H., and Partch, M. M.. “The Decline of Takeovers and Disciplinary Managerial Turnover.” Journal of Financial Economics, 44 (1997), 205–228.CrossRefGoogle Scholar
Morck, R.; Shleifer, A.; and Vishny, R. W.. “Alternative Mechanisms for Corporate Control.” American Economic Review, 79 (1989), 842–852.Google Scholar
Murphy, K. J., and Zimmerman, J. L.. “Financial Performance Surrounding CEO Turnover.” Journal of Accounting and Economics, 16 (1993), 273–315.CrossRefGoogle Scholar
Narayanan, M. P.“Managerial Incentives for Short- Term Results.” Journal of Finance, 40 (1985), 1469–1484.CrossRefGoogle Scholar
Neyman, J., and Scott, E. L.. “Consistent Estimates Based on Partially Consistent Observations.” Econometrica, 16 (1948), 1–32.CrossRefGoogle Scholar
Pan, Y.; Wang, T. Y.; and Weisbach, M. S.. “Learning About CEO Ability and Stock Return Volatility.” Review of Financial Studies, 28 (2015), 1623–1666.CrossRefGoogle Scholar
Pan, Y.; Wang, T. Y.; and Weisbach, M. S.. “CEO Investment Cycles.” Review of Financial Studies, 29 (2016), 2955–2999.CrossRefGoogle Scholar
Rau, R., and Xu, J.. “How Do Ex-Ante Severance Pay Contracts Fit Into Optimal Executive Incentive Schemes? ” Journal of Accounting Research, 51 (2013), 631–671.CrossRefGoogle Scholar
Rogers, J. L.; Skinner, D. J.; and Van Buskirk, A.. “Earnings Guidance and Market Uncertainty.” Journal of Accounting and Economics, 48 (2009), 90–109.CrossRefGoogle Scholar
Roussanov, N., and Savor, P.. “Marriage and Managers’ Attitudes to Risk.” Management Science, 60 (2014), 2496–2508.CrossRefGoogle Scholar
Rusticus, T. O.“Executive Severance Agreements.” Working Paper, University of Pennsylvania (2006).Google Scholar
Schwab, S. J., and Thomas, R. T.. “What Do CEOs Bargain For? ” Washington and Lee Law Review, 63 (2005), 231–270.Google Scholar
Shleifer, A., and Vishny, R. W.. “The Limits of Arbitrage.” Journal of Finance, 51 (1997), 35–55.CrossRefGoogle Scholar
Stein, J. C.“Efficient Capital Markets, Inefficient Firms: A Model of Myopic Corporate Behavior.” Quarterly Journal of Economics, 104 (1989), 655–669.CrossRefGoogle Scholar
Sundaram, R., and Yermack, D.. “Pay Me Later: Inside Debt and Its Role in Managerial Compensation.” Journal of Finance, 62 (2007), 1551–1588.CrossRefGoogle Scholar
Vladimirov, V.“Contract Horizon and Turnover.” Working Paper, University of Amsterdam (2017).CrossRefGoogle Scholar
Von Thadden, E.-L.“Long-Term Contracts, Short-Term Investment and Monitoring.” Review of Economic Studies, 62 (1995), 557–575.CrossRefGoogle Scholar
Warner, J. B.; Watts, R. L.; and Wruck, K. H.. “Stock Prices and Top Management Changes.” Journal of Financial Economics, 20 (1988), 461–492.CrossRefGoogle Scholar
Weisbach, M.“Outside Directors and CEO Turnover.” Journal of Financial Economics, 20 (1988), 431–460.CrossRefGoogle Scholar
Supplementary material: File

Cziraki and Groen-Xu supplementary material

Cziraki and Groen-Xu supplementary material

Download Cziraki and Groen-Xu supplementary material(File)
File 634.9 KB