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Does Firing a CEO Pay Off?

The chief executive officer (CEO) and the top management team are typically viewed as critical to the success or failure of companies. As it is not uncommon for top executives to make value-destroying decisions, the role of internal control mechanisms, such as oversight by a board of directors (BoD), is to safeguard the interests of shareholders by replacing poorly performing incumbent CEOs with new ones.

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But does it pay to fire underperforming CEOs? Doing so can cost shareholders a bundle in severance packages and golden parachute payments. When CEOs at Hewlett-Packard, Bank of New York Mellon, Yahoo!, Kellogg’s, and United Airlines were asked to step down, they walked away with severance packages of tens of millions of dollars. In the S&P 500, CEOs are entitled to receive an average of $22 million in the event they are fired.

The corporate investment decisions of CEO successors offer fundamental insights into the corporate performance-resuscitating role of CEO replacements and whether they improve corporate decision making. Recent research has highlighted the importance of corporate investment decisions in CEO careers, with poor investment results a key reason for forced CEO exits. This is not surprising in view of the paramount importance of corporate investment for the operating and stock performance of a listed company as well as for the whole economy (in 2017, U.S. companies invested more than $4 trillion in growth). To address this question, research has focused on Mergers and Acquisitions (M&A) – the most important form of corporate investment with clearly measurable outcomes – and has documented that poorly performing bidders (those that undertake value destroying M&A) are more likely to be fired.

Yet, two important questions remain: Do new CEOs beat their predecessors’ record of firm performance through superior M&A and other investments? And can monitoring mechanisms linked to the firm’s corporate governance and ownership structure improve the firm’s investment performance through superior CEO hiring decisions?

Read the full story on the Columbia Law School Blue Sky Blog

Published 20 July 2018

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