The role of executive capital and the market for alternative candidates in CEO dismissal and labor market consequences for dismissed chief executives

Abstract

Research on the dismissal of Chief Executive Officers has primarily examined how firm performance and executive power affect dismissal. However, the process used to evaluate a CEO's capabilities is complex, as a myriad of factors affect firm performance outside of the CEO's control and the board often has minimal interaction with the CEO. Instead, the board may be forced to examine external cues or signals that help provide information regarding the CEO's capabilities. Analyzing 3,648 firm-year observations for likelihood of dismissal, this dissertation examines the role that CEO human and reputational capital play with regard to signaling the board regarding the CEO's capabilities as well as the effects of the market for alternative CEO candidates on the likelihood of CEO dismissal. Findings from probit regression analysis indicate that CEOs are less likely to be dismissed when they have greater tenure, a greater base salary, a less negative reputation in the media, and when there are fewer non-CEO inside directors serving on the board. These results suggest that the board identifies some external cues when evaluating CEOs and evaluates visible internal candidates in the decision to dismiss a CEO. Building upon this line of research, the second chapter of this dissertation examines the career consequences of dismissal on the future job prospects of executives. I argue that dismissal serves as a stigma on executive careers which reduces job future prospects. However, executives may use human, reputational, and social capital to buffer themselves from the effects of stigmatization. Examining the re-employment prospects of 88 dismissed executives, results using Cox Proportional Hazards models indicate that executive job prospects at publicly traded organizations are lessened following dismissal for reasons of violation of fiduciary duty or personal conduct. Alternatively, executive re-employment is more likely when executives have experience with prestigious organizations, have a reputation for being a top CEO, have less negative publicity, and are located in a major city. These results suggest that while dismissal may be stigmatizing, such effects can be overcome with acquired human, reputational, and social capital.