Professor Al Ghosh gives a presentation at Fox Business School, Temple University, Philadelphia. During this presentation, Professor Ghosh discusses accounting losses versus profits and CEO turnover.
ABSTRACT: Relying on a linear specification, several studies examine the importance of accounting and stock performance measures for CEO turnover. We suggest that accounting losses reflect managerial effort and quality that are not fully captured in the prior performance measures including profits. Using a non-linear specification around losses, we find a statistically and economically significant relationship between accounting losses and subsequent CEO turnover. Further, the magnitude of the loss also increases the likelihood of CEO turnover. A crucial finding is that once we include losses, accounting performance is no longer incrementally important in explaining CEO turnover. We additionally hypothesize and find that: (1) the impact of losses on CEO turnover depends on whether other firms in the industry also report losses, (2) CEO turnover following losses leads to more outside CEO appointments, and (3) the sensitivity of CEO turnover to losses is affected by the strength of the board and the level of growth opportunities. Collectively, our results suggest that CEOs are penalized for losses and that boards consider other factors along with losses to arrive at CEO retention decisions.