Does Firing a CEO Pay Off?

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?

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