CEO turnover and accounting earnings: The role of earnings persistence
Lee, Sung Won
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This study examines the effect of earnings persistence on the sensitivity of CEO turnover to earnings performance. I find that the sensitivity of forced CEO turnover to earnings performance is stronger when earnings persistence is greater. Additional analysis reveals that the effect of earnings persistence on the CEO turnover-earnings relationship depends on CEO cash compensation-earnings sensitivity and types of turnovers. Specifically, for firms with stronger earnings persistence effects on cash pay-earnings sensitivity, CEOs with good (bad) earnings performance are less (more) likely to leave firms voluntarily. In contrast, for firms with a weaker relationship, CEOs with bad (good) earnings performance are more (less) likely to be forced out. This suggests that in terms of earnings persistence, compensation and forced turnover mechanisms operate as substitutes, and incentive and voluntary turnover mechanisms are complements. Finally, I find that there was a substantial increase in the earnings persistence effect on forced CEO turnover-earnings sensitivity after the Sarbanes Oxley Act (SOX), due primarily to weakened effects of earnings persistence on compensation-performance sensitivity after SOX. Overall, this study suggests that earnings persistence plays a significant role in CEO turnover decisions and its effect depends on the effectiveness of corporate incentive mechanisms.