Abstract
Does the stock market and job market evaluate a CEO based on the performance of his/her previous employer? We answer this question by examining a sample of 48 CEOs who voluntarily resigned from old firms to obtain similar positions with new firms. Using a sample of CEOs that voluntarily resigned from S&P 500 firms during 2004–2012, we find that the stock market’s reactions to announcements of them resigning from old firms and being hired by new firms depend on how well the old firms had performed. The market is able to differentiate a “better” CEO from a “good” one by reacting more negatively when the former resigns and more positively when the former is hired by a new firm. Long-term performances of the firms that hire these executives are consistent with market expectations: the firms that hire the better-performing group are rewarded with significantly better long-term returns than the firms that hire the good-performing executives. It appears that the job market is at par with the stock market— the better group finds jobs much faster than the good group. We also find that better CEOs are more likely than good ones to have a Master’s (or higher) degree.
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Notes
A CEO turnover is considered as voluntary when it occurs due to planned succession, retirement, voluntary resignation, stepping down, bad health, death, or interim replacement. An involuntary turnover occurs when a CEO is fired, forced to resign, or resigned due to scandal, accounting conflicts, and poor performance.
A CEO turnover is considered as voluntary when it occurs due to planned succession, retirement, voluntary resignation, stepping down, bad health, death, or interim replacement. An involuntary turnover occurs when a CEO is fired, forced to resign, or resigned due to scandal, accounting conflicts, and poor performance.
Since operating income does not include taxes, dividends, or interest income received, nor any dividends paid to stockholders, it is argued to be less subjected to managerial manipulation and, therefore, a robust measure of changes in the operating performance of an organization (Smith 1990; Denis and Denis 1995).
Because some of the new firms are private, the sample size of firms who hire Tier 1-CEO is reduced by 6 to 22 and Tier 2-CEO is reduced by 2 to 18.
Bhagat et al. (2010), however, do not find any significant relation between education and the ability of an executive.
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Mukherjee, T., Nguyen, H. CEO ability and firm performance: Stock market and job market reactions. J Econ Finan 42, 138–154 (2018). https://doi.org/10.1007/s12197-017-9390-1
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DOI: https://doi.org/10.1007/s12197-017-9390-1