Uninformative Performance Signals and Forced CEO Turnover

Evaluating the performance of CEOs is one of the most important tasks of corporate boards of directors. When deciding whether to retain or dismiss CEOs, boards should follow the informativeness principle developed by Holmström (1979) and include all valuable performance signals regarding the quality of the CEOs. Of course, boards should also ignore all uninformative performance signals. For example, CEOs should not be rewarded or punished for, in effect, getting lucky or unlucky.

In a recent working paper, I investigate whether boards violate the informativeness principle in firing CEOs by failing to ignore outcomes that are conditionally uninformative. If … Read more