CEO Turnover in a Competitive Assignment Framework

This paper considers the empirical stylized facts about CEO turnover in the context of a competitive assignment model in which CEOs and firms form matches based on multiple characteristics. CEOs are viewed as hedonic goods with multidimensional skill bundles. Likewise, firms' production functions have heterogeneous weights on CEO skills such as firm-specific knowledge, ability to grow sales, and ability to cut costs. There exists a competitive market for CEOs, whose wages are determined analogously to the prices of the hedonic goods in Rosen (1974). The competitive assignment framework with multiple skill dimensions is able to capture several stylized facts which are not explained by existing theories. For example, in our model, both poor relative performance and poor absolute performance are associated with higher rates of CEO turnover. Relative performance evaluation matters even though there is no agency problem or learning, and overall industry performance aspects turnover as well. Our model also makes predictions about the type and pay of the replacement manager conditional on turnover type which are consistent with patterns we document empirically. For example, managers who are fired are more likely to be replaced by industry outsiders than are managers who quit or retire. Moreover, replacement managers in these cases earn significantly more than the incumbent. To document pay and replacement type as a function of the type of turnover event, we construct a large dataset describing turnover events during the period 1992-2006, including the type of turnover event, and the characteristics and pay of the replacement manager.