Kathleen A. Farrell

The Consequences of Forced CEO Succession for Outside Directors

We find an increased likelihood of outside director turnover following forced CEO succession, especially among those directors that are closely aligned with the outgoing CEO, own little equity, and make poor replacement decisions. Directors that remain on the board, however, are more likely to acquire new directorships than those that remain on the board of a matched- sample firm. Overall, the results suggest that outside directors who are not aligned with the CEO and own relatively large equity stakes are rewarded when they remove a poorly performing CEO and replace him or her with a CEO that improves firm performance. Copyright 2000 by University of Chicago Press.

The Match between CEO and Firm

We investigate the role of job-match heterogeneity in the CEO labor market. We document a high percentage of CEO turnovers in the early years of tenure as illustrated by the hazard that increases until the fifth year of CEO tenure and then decreases. Evidence suggests that a good match is more likely if the new CEO performs better than the previous CEO. The best matches tend to occur when inside (outside) CEOs follow previous CEOs who quit (are dismissed). Evidence consistent with match theory in the CEO labor market suggests factors that influence the likelihood of observing a good match.

Celebrity performance and endorsement value: the case of Tiger Woods

An interesting issue little explored in the celebrity endorsement literature is whether or not the activities of a celebrity endorser affect company performance. We examine the impact of Tiger Woods’s tournament performance on the endorsing firm’s value subsequent to the contract signing. We do not find a relationship between Tiger’ss tournament placement and the excess returns of Fortune Brands (parent of Titleist). This is likely due to Titleist being a very small contributor to the total market value of Fortune Brands. We also fail to find a significant relationship for American Express suggesting the market does not view a golfer endorsing financial services as credible. We do, however, find a positive and significant impact of Tiger’s performance on Nike’s excess returns suggesting that the market values the additional publicity that Nike receives when Tiger is in contention to win.

Monitoring by the Financial Press and Forced CEO Turnover

This paper examines Wall Street Journal news stories about 79 firms that forced CEO turnover and a matched sample of firms that did not force CEO turnover. In the two years prior to turnover, firms in the forced-turnover sample were the subjects of 76% more news stories about poor firm performance despite being from the same industry, of similar size, and similar performance as a sample of matched firms. Overall, the evidence suggests that scrutiny of poor firm perfor mance by the financial press increases the likelihood of forced CEO turnover.

Additions to Corporate Boards: Does Gender Matter?

This paper examines the determinants of a firm adding a woman to its board of directors. Using panel data for a sample of large publicly held firms for the years 1990-1999, we find that the probability of adding a woman to a board in a given year is inversely related to the number of woman directors already on the board. Further the probability of adding a woman is substantially increased whenever a woman departs the board relative to the departure of a male outside director. Clearly then, gender is a factor in board hiring decisions. The evidence is mixed, however, as to whether gender became less of a decision factor in the latter part of the decade of the nineties. Lastly, the results suggest that the overall increase in female board representation during the past decade was due to a greater demand for diversity, rather than simply an increase in the pool of qualified female board candidates.

Executive compensation and executive contributions to corporate PACS

This paper estimates the determinants of the contributions made by top executives to their firms Political Action Committee (PAC). We find that executives personal PAC contributions (proxy for the interest of the firm) are positively related to his shareholdings, income and option holdings (proxies for the interests of the executive). Contributions are also higher for CEOs and board members. This is direct evidence that the structure of the contracts between the firm and management, especially compensation, aligns managers personal behavior with the interests of the firm.

Inter-board pay differentials for directors with multiple appointments

We analyse uniformity in the markets valuation of director human capital by comparing director compensation across firms with and without director overlaps. We find that although there is less variation in director compensation for connected boards, which share a common director, than for unrelated boards, there remains a high variation in director compensation for directors with multiple directorships. We also find that active Chief Executive Officers (CEOs), on average, command higher total director compensation in subsequent board appointments. This result holds for appointments where the individual already holds two or more directorships and is counter to the prediction of a busy director effect. Overall, our evidence suggests that active CEOs are high-quality directors or have a high disutility of additional board work and are able to command higher compensation when added to subsequent boards.

Real ploughback earnings as an indicator of enterprise performance: FAS no. 33 disclosures revistited

Existing and potential investors are vitally interested in the improvement of their wealth prospects. Receipt of cash, whether in the form of cash dividends or capital gains, represents fulfilment of this expectation. Such fulfilment is only possible when an enterprise registers growth in its resource base. Reported income is considered a good indicator of success achieved by an enterprise because it represents increase in available resources. An important link between reported income and stock prices is the link between future earnings and current earnings. This study utilizes data from FAS No. 33 to develop real ploughback measure indicating a firms ability to continue its operations successfully and to enhance its future earnings potential. The results of the study show that the market uses sophisticated models in evaluating the signal contained in ploughback earnings.