The purpose of this paper is to investigate the effect of executive severance contract maturity policies on the likelihood of forced turnover and the length of tenure for CEOs who are forced from their positions.
The paper utilizes logistic and accelerated failure time models to test the hypothesis that severance contracts decrease information asymmetries resulting in an increased likelihood of forced turnover and a shortened tenure for those CEOs who are forced out.
The results provide evidence that fixed‐term severance contracts increase the likelihood of forced tenure and decrease the length of tenure for CEOs who experience a forced turnover during the period, while time‐independent contracts do not.
The limitation is the possibility that an omitted variable jointly determines the likelihood of the presence of a severance contract and the effect on forced turnover. Future research should investigate other possibilities beyond the CEO coming from outside of the firm.
The findings confirm that the maturity policies of severance contracts affect forced turnover. The results suggest that there may be a benefit in designing severance contracts to expire to encourage more efficient turnover of underperforming CEOs.
This paper contributes to the empirical corporate finance and accounting literature by differentiating between forced and unforced turnover when analyzing the effects of severance contracts and demonstrating that the time dimension of severance contracts may provide the desired result of encouraging the identification of CEO‐firm mismatches.
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