CEO Turnover, Network Effects, and Firm Performance

Introduction

Organizational theory has been widely used in the literature to study employee turnover (Baron & Hannan, 2001; Boyne et al., 2011; Hannan & Freeman, 1984). The theory suggests that organizational change is disruptive. Prior literature has agreed on the relationship between top management (e.g. CEO) turnover and firm performance. Lin et al. (2008) suggested that a change of chairman implied that the organization power structure of the board of directors is unbalanced, and makes firms’ personnel restless while reducing firm performance. The role of senior executives, such as the CEO, have been recognized as one of the critical assets that sustains an organization’s competitive advantage (Zhang et al., 2016). Today’s organizations are globally integrated enterprises with complex ties such as supply chains, share transactions, and integrated information technology systems across all internal and external business processes. This complexity requires an enhanced executive understanding of the organization and its operations. If a firm encounters more frequent changes of the CEO, it may experience the loss of knowledgeable and skilled senior management in the field who could make more efficient and effective strategic decisions in a timely manner. This, in turn, could result in the loss of their competitive advantage relative to their competitors. Many studies have examined the effect of CEO turnover on organizational performance. However, empirical research on the impact of the frequency of CEO turnover is still sparse among academics. To fill this research gap, we propose to empirically examine the relationship between CEO turnover frequency and firm performance in both the short-term and the long-term. A frequent change in CEO not only has an expected short-term impact on organizational performance, but also a long-term impact. CEO turnover usually causes a short-term fluctuation of its stock price, and brings about an adjustment of organizational strategy and management tactics in the future. These changes will have a considerable and persistent impact on organizational performance.

While examining the influence of the frequency of CEO turnover on firm performance, we pay special attention to a factor that has been under researched in prior literature: the network effects. Network effects play an important role in firm performance. Network theory suggests that organizations are relational effects generated in patterned networks of diverse materials (Larcker et al., 2013). As the complexity of the organizations’ networks increase, the impact of a change (e.g., CEO turnover) may have collateral impacts. Different network structures indicate that organizations have different connections with other firms. It is important to understand whether CEO turnover affects firm performance differently, depending on the network structure. To answer the research questions, this study empirically validates our econometric panel data model using system generalized method of moments (GMM) estimates. In general, this study finds that firms perform poorly over the long-term if they have frequent CEO turnover. It is also found that a better accounting performance over the short-term is more likely from firms with frequent CEO turnover. However, these firms are also less likely to have superior market performance. In addition, the results reveal interesting moderation effects from different organizational network structures. For instance, in the long-term, the betweenness and degree of networks positively moderate the effect of CEO turnover on firm performance. The closeness of networks negatively moderates the relationship between CEO turnover and the firms’ accounting performance, but positively moderates the impact on firms’ market performance. In the short-term, the betweenness and degree of networks negatively moderate the relationship, while network closeness positively moderates the impact.

The remainder of the paper is structured as follows. Section 2 reviews the relevant literature. Section 3 develops the hypotheses. Section 4 discusses the research model and methodology. Section 5 presents the empirical results and analyses. Section 6 concludes our findings and section 7 summarizes our contributions and practical implications.