CEO dismissal: Consequences for the strategic risk taking of competitor CEOs

• Date: 01 November 2020
• Author: Qiang (John) Li,Wei Shi,Kang‐Bok Lee,Brian L. Connelly
• Published date: 01 November 2020
• DOI: http://doi.org/10.1002/smj.3190

RESEARCH ARTICLE

CEO dismissal: Consequences for the strategic

risk taking of competitor CEOs

Brian L. Connelly

1

| Qiang (John) Li

2

| Wei Shi

3

|

Kang-Bok Lee

1

1

Harbert College of Business, Auburn University, Auburn, Alabama, USA

2

HKUST Business School, Hong Kong University of Science and Technology, Kowloon, Hong Kong

3

Miami Herbert Business School, University of Miami, Coral Gables, Florida, USA

Correspondence

Brian L. Connelly, Harbert College of

Business, Auburn University,

415 W. Magnolia Ave, Auburn, AL 36849.

Email: bconnelly@auburn.edu

Abstract

Research Summary: We propose that CEO dismissal

can change the strategic decision-making of CEOs at

competing firms. Competitor CEOs will experience an

increase in job insecurity, which motivates them to

refrain from strategic risk taking. We also identify two

key boundary conditions that shape the influence of

CEO dismissal on competitor CEOs' risk taking. We test

our ideas on a sample of CEO dismissals among S&P

1500 firms using a novel synthetic control method

approach to matching. We also test the underlying the-

oretical mechanism using a complementary experiment

on top executives. Taken together, these studies

advance CEO dismissal research by investigating the

spillover effect of CEO dismissal on competitor CEOs'

behaviors.

Managerial Summary: The position of CEO is more

volatile today than ever. When it comes to pulling the

trigger on CEO dismissal, companies have increasingly

twitchy fingers. Therefore, it seems important to ask:

when a company fires their CEO, what happens at all

the other companies in the industry? We suggest the

CEOs at those companies will start worrying about

their job. This fear affects their strategic decision-

All authors contributed equally to this study.

Received: 16 August 2018 Revised: 30 January 2020 Accepted: 2 March 2020 Published on: 15 July 2020

DOI: 10.1002/smj.3190

2092 © 2020 John Wiley & Sons, Ltd. Strat Mgmt J. 2020;41:2092–2125.wileyonlinelibrary.com/journal/smj

making. They dial back on risk and let opportunities

for growth slip away. This is especially true for certain

competitors. Firing a CEO, therefore, has ripple effects

throughout the whole industry.

KEYWORDS

CEO turnover, competition, corporate governance, job insecurity,

strategic risk taking

1|INTRODUCTION

Whether and when to dismiss a CEO is one of the most consequential decisions a firm makes

(Crossland & Chen, 2013; Zhang, 2008). Management scholars have thus devoted considerable

research attention to the antecedents and consequences of CEO dismissal, but few have consid-

ered the potential side effect of how CEO dismissal at one firm might change the behavior of

firms around them. Executive turnover is especially salient to competitor CEOs because firms

competing against one another face similar external environments and serve as important refer-

ence points (Fiegenbaum, Hart, & Schendel, 1996). Executives often relate to events happening

to their competitors (cf, Liu, Fisher, & Chen, 2018; Morgeson, Mitchell, & Liu, 2015), so we

expect that CEO dismissal could affect the behavior of competitor CEOs.

In this study, we investigate whether the dismissal of a CEO can affect competitor CEOs'

strategic risk taking. Given the similarity of their firms, CEOs of direct competitors often pay

close attention to each other's behavior and the consequences of each other's actions (Connelly,

Tihanyi, Certo, & Hitt, 2010). Because awareness is high among competitors, firms that dismiss

their CEOs not only generate consequences for their own firms, their decisions can ripple

through to their competitors (Yi, Zhang, & Windsor, 2018; Zhang & Rajagopalan, 2004). CEOs

who observe dismissal of a peer CEO might project that dismissal onto their own circumstances

(in this study, we use the term “peer CEO”to refer to the CEO of a direct competitor). Seeing a

CEO get fired is a highly prominent and relevant event that could lead competitor CEOs to

think about the vulnerability of their own position (cf, Shi, Zhang, & Hoskisson, 2017), which

may heighten feelings of job insecurity among competitor CEOs.

The CEO has reached the pinnacle of the organization, and job preservation is of paramount

concern when they face heightened job insecurity (Bertrand & Mullainathan, 2003; Mannor,

Wowak, Bartkus, & Gomez-Mejia, 2016). One course of action over which CEOs have signifi-

cant discretion is firm risk taking (Shi, Connelly, Mackey, & Gupta, 2019). Although risk taking

could improve a firm's long-term competitiveness and performance (Hoskisson, Chirico,

Zyung, & Gambeta, 2017), it can be associated with significant decision errors and give rise to

performance swings. Motivated to preserve their job, we argue that competitor CEOs will

refrain from risk taking to focus on ensuring their job safety rather than seek possible long-term

performance gains via risky endeavors. We also propose that feelings of job insecurity are likely

to affect the decisions of some competitor CEOs more than others (Sverke & Hellgren, 2002).

We combine archival data with an experiment to test our ideas and find support for our

arguments. Our study contributes to the literature in at least two ways. First, scholars have

devoted substantial attention to investigating the organizational implications of CEO dismissal

(e.g., Crossland & Chen, 2013; Denis & Denis, 1995; Shen & Cannella, 2002), but we add to this

CONNELLY ET AL.2093

literature by theorizing about the impact of dismissal on competitor CEOs' decision making.

Second, we contribute to the literature on managerial risk taking. Prior research shows that

internal governance factors affect risk taking (Baysinger & Hoskisson, 1990) and that the

actions of competitors may also be important to risk taking (Shi, Zhang, & Hoskisson, 2017),

but our study adds a potentially important new antecedent to managers' strategic risk-taking

endeavors.

2|CONCEPTUAL BACKGROUND

2.1 |CEO dismissal

Given the important role of CEOs in affecting strategic decisions and firm performance

(Quigley & Hambrick, 2015), management researchers have gone to great lengths to understand

and explain the implications of CEO dismissal (i.e., forced resignation as opposed to routine

retirement or voluntary exit). In this literature (e.g., Jenter & Kanaan, 2015; Shen &

Cannella, 2017; Zhang, 2008), scholars classify CEO turnover as a dismissal if: (a) the CEO was

fired, forced out from the position, or departed due to policy differences or (b) the departing

CEO's age is less than 60, and the announcement does not report that the CEO died, left

because of poor health, or accepted another position elsewhere or within the firm or (c) the

CEO “retires”but leaves the job within 6 months of the retirement announcement.

1

This research describes how CEO dismissal can have a disciplinary effect on successors and

affect firm performance and strategic change (Wiersema & Zhang, 2011). For example, Kang

and Shivdasani (1995) find that firms experience significant performance improvements follow-

ing CEO dismissal. Similarly, Denis and Denis (1995) find that forced resignation of top man-

agers is followed by large improvements in performance. Findings by Shen and Cannella (2002)

corroborate the notion that CEO dismissal has a stronger positive effect on firm performance

than routine CEO succession. Yet, a meta-analysis suggests that firms experience a decline in

short-term performance subsequent to CEO succession (Schepker, Kim, Patel, Thatcher, &

Campion, 2017). Other studies focus on the extent to which CEO dismissal results in strategic

change. For instance, Nakauchi and Wiersema (2015) observe a high likelihood of strategic

change after nonroutine executive succession. Management change is also associated with an

increased probability of divesting a poorly performing acquisition (Weisbach, 1995). Findings

by Wiersema (1995) indicate that firms experiencing nonroutine executive turnover subse-

quently underwent more restructuring activities than firms without such turnover.

These studies support the idea that CEO dismissal can affect strategic change and perfor-

mance at the focal firm. Although Yi et al. (2018) show that investors of competitor firms can

react positively to announcements of dismissal of newly appointed CEOs, how competitor CEOs

themselves react is still unknown. In particular, research has suggested that CEOs look to their

peers when making strategic decisions (Connelly, Johnson, Tihanyi, & Ellstrand, 2011;

Geletkanycz, Boyd, & Finkelstein, 2001). Recent studies have built on this work to show that

major events experienced by a CEOs' peers can affect their decisions. For example, Shi, Zhang,

and Hoskisson (2017) find that CEOs become acquisitive after their industry peers have won

1

We exclude cases of CEO dismissals associated with personal or organizational misconduct because such dismissals

provide a rationale for dismissal that does not resonate with competitors and therefore may not increase competitor

CEOs' job insecurity.

2094 CONNELLY ET AL.