Employee disputes and CEO turnover: Evidence from labor lawsuits

Published date01 April 2019
Date01 April 2019
AuthorBlake Rayfield,Omer Unsal
DOIhttp://doi.org/10.1002/jcaf.22379
BLIND PEER REVIEW
Employee disputes and CEO turnover: Evidence from labor
lawsuits
Omer Unsal
1
| Blake Rayfield
2
1
Merrimack College, Girard School of
Business, Department of Finance, North
Andover, Massachusetts
2
Scott College of Business at Indiana State
University, Terre Haute, Indiana
Correspondence
Omer Unsal, Merrimack College, Girard
School of Business, 315 Turnpike St. North
Andover, MA 01845.
Email: unsalo@merrimack.edu
Abstract
In this study, we use a unique hand-collected data set of employee lawsuits to
understand the effect of litigation on CEO turnover. We gather 28,258 employee
disputes (after initial court hearing) dating between the years 2000 and 2014 to test
the relationship between executive turnover following employee allegations. We
find increased turnover of CEOs following labor lawsuits. Additional analysis sug-
gests that, following the lawsuits, CEO compensation decreases and becomes more
sensitive to cash holding. Our results show that employee lawsuits have an impact
on CEO turnover, regardless of the case outcome or motivation. Overall, we docu-
ment the importance of employee treatment in the workplace. We conclude
employee treatment may impact both the tenure and future job prospects of a CEO.
KEYWORDS
CEO tenure, CEO pay, labor litigation, labor law
JEL CLASSIFICATION
G30; K15; K31; K41
1|INTRODUCTION
This paper examines the pre- and posttrial consequences for
corporate executives after being subject to labor-related alle-
gations. We believe that labor litigation (where the cause of
action is listed as discrimination, harassment, benefits,
wage/tipping policy, layoffs, or union allegations) may
impact the tenure of managerial positions as well as firm
performance itself. Nearly all businesses are subject to
increasing litigation risk. The growth of employee-related
litigation has been no exception to increase in litigation risk.
In the past 20 years, employee lawsuits have risen approxi-
mately 400%.
1
Approximately 89,000 discrimination char-
ges (regarding age, disability, race/color, religion, gender,
sexual orientation, etc.) were filed against U.S. firms in
2015.
2
Furthermore, U.S. companies had an approximately
12% chance of having an employment-related lawsuit in
which may result in substantial defense or settlement costs.
3
Because of the increasing costs, it is important for firms and
managers to understand the direct and indirect consequences
of labor-related legal disputes. In this paper, we study the
impact of labor-related disputes on CEO turnover.
Firms encounter several types of lawsuits with charges
related to securities allegations, labor mistreatment, environ-
mental, antitrust, intellectual property, and contractual.
Many studies examine the effect of securities litigation on
managerial talent; Humphery-Jenner, 2012; Romano, 1991;
Cheng, Huang, Li, & Lobo, 2010; Correia & Klausner,
2012; Karpoff, Scott Lee, & Martin, 2008; Fich &
Shivdasani, 2007. The literature has established that securi-
ties lawsuits cause CEOs to face market-based penalties,
such as turnover, or reduced compensation packages for cor-
porate wrongdoings, Aharony, Liu, and Yawson (2015).
However, there are other types of corporate wrongdoings that
may eventually influence corporate governance practices. To
study the effect of labor-related litigation, we employ a hand-
collected data set of employee lawsuits, complaints, viola-
tions, and other inspection to test the relationship between
Received: 23 February 2018 Revised: 13 March 2019 Accepted: 14 March 2019
DOI: 10.1002/jcaf.22379
44 © 2019 Wiley Periodicals, Inc. wileyonlinelibrary.com/journal/jcaf J Corp Acct Fin. 2019;30:4463.
labor disputes and managerial position. In this paper, we seek
to understand the effect of employee lawsuits by asking the
following questions: Is there a systematic link between
employee lawsuits and CEO turnover? Do firms with a
greater number of employee allegations punish their top exec-
utives? And what is the impact of facing frequent employee
lawsuits on firm performance?
Literature has focused on the impact of securities litiga-
tion on CEO performance, turnover, and more. In this study,
we investigate the consequences of labor litigation on CEOs.
Both labor and securities litigation are subject to direct and
indirect costs. Both types of litigation impose large costs on
a firm in the form of court fines and fees, legal team labor
costs, or potentially large settlement costs. Furthermore, both
types of litigation face similar indirect costs as well, such as
reputational costs. While there are many similarities between
labor and securities litigation, there are also distinct differ-
ences. First, firms are subject to labor litigation more fre-
quently than security litigation. Second, reputational costs
associated with labor disputes affect shareholders and
employees differently than do securities litigations. SEC or
security litigation more directly impacts shareholders. Fur-
thermore, the largest reputational costs of labor disputes may
be to a firm's labor and knowledge capital. If a CEO or other
managerial position loses the confidence of their labor talent,
they may consequently lose the confidence of shareholders.
One possible explanation between litigation and manage-
rial turnover may be the cost factor associated with lawsuits.
A legal action generates direct costs (i.e., attorney fees and
court fees, settlements, and/or judgments) and indirect costs
(i.e., CEO turnover, reputational loss) which may eventually
affect the firm performance as well as corporate governance
practices. Our work is to understand if and how labor-related
allegations are affecting CEOs through direct and indirect
costs. Our work is to understand if and how CEOs are being
disciplined from labor allegations that are filed during the
executives' tenure.
The importance of employee disputes on managerial
turnover and firm value has not been explicitly investigated
at the firm level in previous studies. We fill this gap in the
literature by testing (a) if employee lawsuits increase the
executive turnover, (b) why the case characteristics can
influence CEO turnover, (c) what discipline channels are
implemented for CEOs after labor disputes, and (d) is firm
performance affected by litigations filed by employees
against their parent firms. Our study represents an initial
analysis of a new panel data set of employee lawsuits, com-
plaints, violations, inspections, and other allegations. First,
we analyze whether employee litigations increase the likeli-
hood of CEO turnover. As mentioned previously, labor liti-
gation has a substantial direct and indirect cost to firms. We
hypothesize the pressure from added costs leads to a higher
CEO turnover. Second, we investigate if CEOs suffer from
reduced compensation packages following the costly allega-
tions. Third, we examine litigations affect firm performance,
which may explain the potential changes in corporate
governance.
Our sample consists of 2,923 unique firms and 5,694 dis-
tinct CEOs from between 2000 and 2014, and we find strong
evidence employee disputes significantly increase the likeli-
hood that the CEO will leave the company. Initially, we find
that CEOs experience increased turnover following the
employee litigations during their serving time. In other
words, work-related allegations yield to managerial turnover
in our sample.
The paper proceeds as follows. We provide a summary
of existing literature on and research hypotheses in
Section 2. In Section 3, we present several sources of hand-
collected data used in this study. In Section 4 we discuss our
findings, and we further test our findings in Section 5.
Finally, in Section 6, we draw the conclusions from our
findings.
2|LITERATURE REVIEW AND
HYPOTHESIS DEVELOPMENT
The relationship between executive turnover and lawsuits
(securities, environment, intellectual property, antitrust, and
contractual) has been documented in prior studies. For
example, securities lawsuits are followed by increased man-
agerial and director turnover (Beneish, 1999; Cheng et al.,
2010; Ferris, Jandik, Lawless, & Makhija, 2007; Fich &
Shivdasani, 2007; Humphery-Jenner, 2012; Karpoff et al.,
2008). Fiordelisi and Ricci (2014) find organizational cul-
ture can also influence CEO turnover. Security-related liti-
gation has been found to influence CEO turnover (Collins,
Reitenga, & Sanchez, 2008; Karpoff et al., 2008; Niehaus &
Roth, 1999; Romano, 1991). Correia and Klausner (2012)
document an increased likelihood of CEO and CFO turn-
over following the Securities Exchange Commission pro-
ceedings. Most of the previously mentioned studies focus
on securities and fraud-related lawsuits; however, our paper
is the first large-scale empirical study to examine the labor-
related allegations and managerial turnover in public
companies.
We believe that nonsecurities litigations, such as those
involving labor, workplace, and/or wage-related disputes,
can increase the likelihood of CEO turnover. The previous
literature shows that litigation creates substantial costs to
firms (Coffee, 1986; Haslem, 2005; Romano, 1991). We
expect increased firm costs to generate a shareholder loss
after the announcement of litigation (Bhagat, Bizjak, &
Coles, 1998; Bhattacharya, Galpin, & Haslem, 2007; Feroz,
Park, & Pastena, 1991; Gande & Lewis, 2009; Wier, 1983).
UNSAL AND RAYFIELD 45

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