Business Management Dynamics

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ISSN: 2047-7031

bmd Business and Management Dynamics bmd
ISSN: 2047-7031  
Volume  7   Issue 06  2017  
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Article Abstract
Tradeoff Analysis of Ousting the CEO
Keywords:  impeachment; intrafirm political economy; CEO ousting; CEO turnover
Pedro Hemsley and Rafael Morais
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.
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