“Default Probability and Forward Looking Performance Evaluation in Forced Turnover of CEO and CFO” by Andy Young Han KIM
Andy Young Han KIM
University of Minnesota
Prior research in executive turnover and governance has found that past performance is the primary determinant of top manager dismissal. Stock prices, which serve as the base of forward looking performance evaluation, are inevitably noisy. In this paper, I find that default probability using the structural model of default is more informative than the stock price based performance measures in understanding forced turnover of top managers. Using hand collected data regarding CEO and CFO departures, I find that better governed firms fire a CEO or CFO sensitively to firm performance proxied by default probability. I do not find that the forced turnover became more sensitive to firm performance after Sarbanes Oxley Act of 2002. Instead, I find such increase in turnover-performance sensitivity since 1998, which is consistent with Kaplan et al. (2006).