Why Are CEOs Rarely Fired? Evidence from Structural Estimation

I evaluate the forced CEO turnover rate and quantify effects on shareholder value by estimating a dynamic model. The model features learning about CEO ability and costly turnover. To fit the observed forced turnover rate, the model needs the average board of directors to behave as if replacing the CEO costs shareholders at least $200 million. This cost mainly reflects CEO entrenchment rather than a real cost to shareholders. The model predicts that shareholder value would rise 3% if we eliminated this perceived turnover cost, all else equal. The model also helps explain the relation between CEO firings, tenure, and profitability.     

Do Funds Make More When They Trade More?

We model fund turnover in the presence of time‐varying profit opportunities. Our model predicts a positive relation between an active fund's turnover and its subsequent benchmark‐adjusted return. We find such a relation for equity mutual funds. This time‐series relation between turnover and performance is stronger than the cross‐sectional relation, as the model predicts. Also as predicted, the turnover‐performance relation is stronger for funds trading less‐liquid stocks and funds likely to possess greater skill. Turnover is correlated across funds. The common component of turnover is positively correlated with proxies for stock mispricing. Turnover of similar funds helps predict a fund's performance.     

Lucky CEOs and Lucky Directors

We study the relation between opportunistic timing of option grants and corporate governance failures, focusing on “lucky” grants awarded at the lowest price of the grant month. Option grant practices were designed to provide lucky grants not only to executives but also to independent directors. Lucky grants to both CEOs and directors were the product of deliberate choices, not of firms’ routines, and were timed to make them more profitable. Lucky grants are associated with higher CEO compensation from other sources, no majority of independent directors, no outside blockholder on the compensation committee, and a long‐serving CEO.     

Do Short-Term Objectives Lead to Under- or Overinvestment in Long-Term Projects?

We examine managerial investment decisions in the presence of imperfect information and short-term managerial objectives. Prior research has argued that such an environment induces managers to underinvest in long-run projects. We show that short-term objectives and imperfect information may also lead to overinvestment, and we identify how the direction of the distortion depends upon the type of informational imperfection present. When investors cannot observe the level of investment in the long-run project, suboptimal investment will be induced. When investors can observe investment but not its productivity, however, overinvestment will occur.