Seminario - Elisa del Sordo

Elisa Del Sordo (LUISS University) will present her paper “Firm performance and CEO dismissal: A necessary condition investigation,” written with Ryan Krause (University of Iowa).

Abstract

Extensive scholarship has shown that poor firm performance increases the probability of CEO dismissal. Agency theory provides a ready explanation for this relationship: CEOs are the agents of shareholders, and the board of directors who acts on shareholders’ behalf will replace the CEO if the CEO is failing to advance shareholders’ interests. Such a theoretical explanation assumes, however, a sufficiency relationship that regularly fails to manifest. Many firms perform poorly for years and the CEO is not dismissed. Moreover, there are many non-performance-related reasons for CEO dismissal, such as wrongdoing or political infighting. Thus, we raise the question of how necessary poor firm performance is for a CEO to be dismissed. Based on the assumptions of shareholder primacy in agency theory, we propose that while many factors may prevent an underperforming CEO from being dismissed, a CEO will not be dismissed if their firm is performing at a high level. A Necessary Condition Analysis of S&P 1500 firms from 2000 to 2021 shows that CEO dismissal typically occurs only if an organization’s total shareholder return is in the bottom half of the value range. In contrast, poor return on assets shows limited evidence as a necessary condition for CEO dismissal.