Looking back to move forward: social benchmarks and historical performance in CEO turnover
Revista : Review of Managerial ScienceTipo de publicación : ISI Ir a publicación
Abstract
The governance and succession literature has analyzed the relationship between firm performance and chief executive officer (CEO) dismissal using the behavioral theory of the firm. Accordingly, firms set aspiration levels based on the firm’s current and past financial performance and/or the performance of similar firms. Not satisfying these aspirations can trigger CEO dismissal. While research on aspiration levels has grown, there is little evidence of the most appropriate operationalization of these aspirations. Further, managers and directors may receive conflicting performance feedback based on the different operationalizations of aspiration levels. As a result, the variance explained by performance variables to explain CEO dismissal is modest, and meta-analyses on this subject are inconclusive. Using accounting, financial, and CEO data from 104 publicly listed Chilean firms for the 2004-2019 period and employing econometric models, we compared how performance gaps based on three types of aspiration levels-ROA, social/industry, and historical-relate to CEO dismissal. We found that performance gaps based on the various types of aspiration levels were strongly associated with CEO dismissal. Moreover, social aspirations had a more pronounced impact on CEO dismissal than historical aspirations, with the latter becoming more salient once industry benchmarks were met. Additionally, the influence of historical aspiration levels on CEO dismissal tended to increase as more periods were considered, suggesting that the more significant the strategic shift required, the longer the historical period firms examine. As a result, even well-performing CEOs (relative to industry peers) could still be dismissed if their current performance fell short of their own or their predecessors’ past success.