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Tradeoff Analysis of Ousting the CEO

Business management dynamics, 2017-12, Vol.7 (6), p.34 [Peer Reviewed Journal]

2017. This work is published under http://creativecommons.org/licenses/by/3.0 (the “License”). Notwithstanding the ProQuest Terms and Conditions, you may use this content in accordance with the terms of the License. ;EISSN: 2047-7031

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  • Title:
    Tradeoff Analysis of Ousting the CEO
  • Author: Hemsley, Pedro ; Morais, Rafael
  • Subjects: Stockholders
  • Is Part Of: Business management dynamics, 2017-12, Vol.7 (6), p.34
  • Description: We explore the tradeoffs involved in having the possibility of ousting a CEO that is perceived by shareholders to be of low quality (bad type) or as badly behaved (low effort). We present the economic problem as analogous to a typical choice of a political system – similar to impeaching a nation’s president – applied to the intrafirm environment. We propose a theoretical model where uncertainty on the CEO’s ability plays a crucial role and is valued by the board of directors (or shareholders). Shareholders choose the optimal probability of ousting the CEO after receiving a bad signal on her effectiveness, given that they also value stability. Results show that this problem presents no interior solution: depending on parameter values, the board always impeaches the CEO or never does so (after a bad signal). Having this in mind, an ineffective CEO has an incentive to increase his performance, even at a personal cost, in order to achieve the threshold of performance (company earnings or profits for example) above which he is never kicked out.
  • Publisher: London: Society of Business and Management Dynamics (SBMD)
  • Language: English
  • Identifier: EISSN: 2047-7031
  • Source: ROAD: Directory of Open Access Scholarly Resources
    ProQuest Central
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