Corporate Performance and CEO Turnover: The Role of Performance Expectations

We are grateful to Lynch, Jones, and Ryan, Inc. for use of the I/B/E/S data base and to Lawrence Brown, James Meindl, Jerry Newman, Gerald Salancik, participants in the Northeastern University Human Resources Management research seminar, and the ASQ reviewers for their valuable comments. We would also like to thank Linda Pike for her editorial insights. The authors are listed in alphabetical order. This paper proposes that the inconsistent findings in previous studies of the relationship between corporate performance and CEO turnover may be due to insufficient attention to the type of performance indicator used by the individuals responsible for making CEO turnover decisions, namely, the board of directors. We argue that the board develops expectations of corporate performance, which it then uses to judge the CEO's performance. The study reported here analyzes financial analysts' forecasts of corporate performance, as a surrogate for the expectations board members could be expected to have, and then examines the relationship of forecasts to turnover. The principal finding is that turnover occurs when reported annual earnings per share fall short of expectations. For a sample of 408 CEOs under the age of retirement, this measure of corporate performance is a predictor of CEO turnover, whereas mechanical algorithms of abnormal security returns and historical accounting ratios are not.'