Adapt or Perish: Evidence of CEO Adaptability to Strategic Industry Shocks
March 28, 2013 Leave a comment
Adapt or Perish: Evidence of CEO Adaptability to Strategic Industry Shocks
Wayne R. Guay University of Pennsylvania – Accounting Department
Daniel J. Taylor University of Pennsylvania – The Wharton School
Jason J. Xiao University of Pennsylvania – The Wharton School
March 13, 2013
Abstract:
Prior turnover literature documents various signals of poor performance that lead a board of directors to terminate the CEO, but does not explore the underlying causes of the CEO’s poor performance. Recognizing that terminated CEOs have often been successful earlier in their tenure, we conjecture that strategic shocks to a firm’s business environment can cause the board to decide that the existing CEO’s skills do not fit with the firm’s current leadership needs. Moreover, prior research on manager ability engenders the question of whether managers are specialists or are instead capable of adapting their “style” to the changing economic conditions. We examine industry-level changes in investing, financing, and operating policies, and their effects on CEO turnover. Our turnover results suggest that CEOs struggle to adapt to a change in industry globalization, investment and marketing efforts. We also find that boards consider the CEO’s performance in response to strategic industry shocks when inferring the CEO’s adaptability, and that the sensitivity of turnover to these shocks varies with activist investors, CEO tenure, and CEO entrenchment.
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