"CEO Dismissal: The Role of Investment Analysts as an External Control Mechanism"
Speaker
Abstract
| This study was motivated by the highly visible and increasing incidence of CEO dismissal in large public US firms. While poor firm performance has been shown to be a predictor of CEO dismissal, little is known about the role of the firm’s external constituents in CEO dismissal. In this study, we argue that investment analysts, as knowledgeable experts who provide research intelligence on companies, serve an important external monitoring role over management. Their ratings and reports can influence not only how investors perceive the firm, but the board’s evaluation of the firm and its leadership as well. Our study is the first to examine how investment analyst ratings of a company’s stock can affect the probability of CEO dismissal. Focusing on the S&P 500, we find that firms with lower average analyst ratings, a downgrade in analyst ratings, or a higher percentage of sell recommendations all experience a greater probability of CEO dismissal. We also found that boards of firms with higher market capitalization are more prone to discipline CEOs. We argue that investment analysts, by providing an independent and expert assessment of the firm and its future prospects, provide information beyond what is provided by the firm through its financial statements. Furthermore, investment analysts’ opinions matter in that they influence the demand for, and thus the price of, the firm’s stock. As a result, investment analysts’ reports influence the board’s perception of the firm and its leadership, and can thus serve as an important external control mechanism. |
| Contact information: |
| Dr. Raymond van Wijk |
