CEO Dismissals - A Financial Analysis

Abstract

This thesis investigates the relationship between financial reporting data and the board’s decision to dismiss a CEO. The analysis was performed on a sample of 30 CEO dismissals from S&P 1500 companies in the year of 2019. The financial data of interest are proposed variables and ratios from companies’ income statements and balance sheets, designed to give a deeper understanding of the phenomenon of CEO dismissals. Variables were analysed in depth, seeing how they changed in a period of five years leading up to the dismissal. Following the results from t-tests, we found five significant variables, indicating that boards use these actively to evaluate a CEO’s performance. Two of these, ROA and GPA, are traditional performance measurements commonly brought up by research. The three remaining significant variables, Current Ratio, Working Capital / Total Assets, and Cash Balance / Total Liabilities, are all liquidity ratios. These indicate that boards find liquidity as a valuable trait when assessing the overall health of a company, arguably more important than the other traditional measurements of performance. This is an important contributor to the already existing literature on the topic, and gives a better overall understanding of how boards use financial reporting data in their evaluation of CEO performance.