Do CEO dismissal improve financial performance?: An empirical study of companies in the S&P 1500 Index

Abstract

There has been a drastic increase in CEO dismissals in recent years. This paper studies the effects a CEO dismissal has on financial performance in light of a company’s corporate governance to see if the increase in dismissals is justified. We analyze the financial performance of a large sample of US companies in the S&P 1500 Index. We find that companies that dismissed their CEO between 2010 and 2018 perform significantly worse in the years leading up to dismissal and have signs of improved performance after dismissal. However, we find that the performance three years after dismissal is not better than two years before, and one measurement even shows that it decreases. Our findings suggest that CEO dismissals do not seem to improve financial performance. Implications of our findings are that the decision to dismiss a CEO when financial performance is poor seems to be an irrational act by the board of directors of making the CEO a scapegoat to illustrate control.