Two Papers On CEO Turnover

I don’t have a grand point to make about this, but I was trying to look up some data on CEO job security and thought these two papers were interesting. First Steven Kaplan and Bernadette Minton, “How Has CEO Turnover Changed? Increasingly Performance Sensitive Boards and Increasingly Uneasy CEOs”:

We study CEO turnover – both internal (board driven) and external (through takeover and bankruptcy) – from 1992 to 2004 for a sample of large U.S. companies. Annual CEO turnover is higher than that estimated in previous studies over earlier periods. Turnover is 14.5% from 1992 to 2004, implying an average tenure as CEO of less than seven years. In the more recent period since 1998, total CEO turnover increases to 16.1%, implying an average tenure of just over six years. Internal turnover is significantly related to three components of firm performance – performance relative to industry, industry performance relative to the overall market, and the performance of the overall stock market. The relation of internal turnover to performance intensifies after 1997 in that turnover after 1998 is more strongly related to all three measures of performance in the contemporaneous year. External turnover is also related to all three measures of performance over the entire sample period, but there is not a sharp difference between the two sub-periods. We discuss the implications of these finding for various issues in corporate governance.

Basically the modern-day CEO is much richer than the classic CEO of yore, but he’s also much more likely to lose his job. On the other hand, there’s Lucian Taylor “Why Are CEOs Rarely Fired? Evidence from Structural Estimation” (PDF):

I evaluate the forced CEO turnover rate and quantify e!ects on shareholder value by estimating a dynamic model. The model features learning about CEO ability and costly turnover. To fit the observed forced turnover rate, the model needs the average board of directors to behave as if replacing the CEO costs shareholders at least $200 million. This cost mainly reflects CEO entrenchment rather than a real cost to shareholders. The model predicts that shareholder value would rise 3% if we eliminated this perceived turnover cost, all else equal. The model also helps explain the relation between CEO firings, tenure, and profitability.

Note that Taylor is not contradicting Kaplan and Minton (indeed, Kaplan was on Taylor’s dissertation committee) but is rather explicitly citing and extending their research findings. CEO job security is on the decline, but still seems higher than it ought to be.