Lucian A. Taylor

Why are CEOs Rarely Fired? Evidence from Structural Estimation

Two percent of CEOs are fired per year on average. To evaluate this magnitude, I solve and estimate a dynamic model of forced CEO turnover. The model features costly turnover and learning about CEO ability. To rationalize the two percent firing rate, boards must behave as if replacing the CEO costs shareholders 5.9% of the firms assets. This cost mainly reflects CEO entrenchment and poor governance ather than a real cost for shareholders. In terms of both direction and magnitude, the model helps explain the relation between CEO firings and tenure, profitability, and stock returns.

CEO wage dynamics: Estimates from a learning model

The level of Chief Executive Officer (CEO) pay responds asymmetrically to good and bad news about the CEOs ability. The average CEO captures approximately half of the surpluses from good news, implying CEOs and shareholders have roughly equal bargaining power. In contrast, the average CEO bears none of the negative surplus from bad news, implying CEOs have downward rigid pay. These estimates are consistent with the optimal contracting benchmark of Harris and Holmstrom (1982) and do not appear to be driven by weak governance. Risk-averse CEOs accept significantly lower compensation in return for the insurance provided by downward rigid pay.