Risk and CEO Turnover

This paper investigates how performance risk impacts a board’s ability to learn about a CEO’s unknown talent. We theorize that the information content of performance is increasing in idiosyncratic risk and decreasing in systematic risk. We provide robust empirical evidence that the likelihood of CEO turnover is increasing in idiosyncratic risk and decreasing in systematic risk, and that turnover-performance-sensitivity is also increasing in idiosyncratic risk and decreasing in systematic risk. We further investigate relations between the threat of termination and CEO compensation, documenting that for retained CEOs, both subsequent pay-performance-sensitivity and pay levels decrease in the probability of turnover.