The Impact of CEO Turnover on Property–Liability Insurer Performance

ABSTRACT Chief executive officer (CEO) turnover has long been an important topic in the academic literature. Previous research has focused mostly on the rationale for CEO turnovers, or circumstances that lead to CEO changes, with much less attention paid to how CEO turnovers affect future firm performance. We extend the literature regarding the impact of CEO turnover on performance using data for U.S. property-liability insurers. Measuring firm performance with cost efficiency (CE) and revenue efficiency (RE) scores, we find strong support for the hypothesis that firms with a CEO turnover, especially those with a nonroutine turnover, experience more favorable performance changes than firms without a CEO turnover. INTRODUCTION The issue of chief executive officer (CEO) turnover has long been an important topic in the academic literature. Jensen and Warner (1988) characterize top executive changes as a "key variable in understanding the forces disciplining managers" (pp. 19-20). Huson, Parrino, and Starks (2001) claim that CEO changes have "long term implications for a firm's investment, operating, and financing decisions" (p. 2266). Previous research on the issue has mostly focused on the rationale for CEO turnovers or circumstances that lead to CEO changes (e.g., Coughlan and Schmidt, 1985; Warner, Watts, and Wruck, 1988; Weisbach, 1988). Another critically important question, which has received relatively less attention to this point, is how CEO turnovers affect future firm performance. (1) Since CEO changes often occur as the result of poor firm performance (Coughlan and Schmidt, 1985; Warner, Watts, and Wruck, 1988; Weisbach, 1988; Fee and Hadlock, 2004), it is critically important to understand whether such changes actually result in improved future performance. In this article, we extend the limited literature regarding the impact of CEO turnover on performance by investigating the issue within the context of the U.S. property-liability insurance industry. The research is designed to answer two primary questions: (1) Do CEO turnovers lead to improved firm performance? and (2) Do different types of turnovers (i.e., voluntary turnovers and involuntary turnovers) have different levels of impact on post-turnover performance? This study contributes to the literature in several important ways. First, this is one of the first papers to empirically incorporate frontier efficiency analysis into a corporate governance study. Our measures of performance are cost efficiency (CE) and revenue efficiency (RE) scores. Measuring performance with efficiency scores offers several advantages over those measures commonly used in previous studies, such as stock price changes and accounting performance measures. (2) Frontier efficiency scores have an advantage over stock prices as measures of performance in that they allow the study to include both public and private firms (Cummins, Tennyson, and Weiss, 1999; Cummins and Xie, 2008), while stock prices are only available for publicly traded firms. The use of efficiency scores as measures of performance also has advantages over the use of accounting performance measures because the calculation of efficiency scores takes into account the multidimensionality of a firm's production process and thus offers a more informative measure of firm performance than accounting performance measures such as return on assets (ROA) and return on equity (ROE), which are single-dimension measures (Cummins and Weiss, 2000; Cummins and Xie, 2009). As indicated in Cooper, Seiford, and Tone (2000), "DEA (Data Envelopment Analysis) has also been used to supply new insights into activities (and entities) that have previously been evaluated by other methods. For instance, studies of benchmarking practices with DEA have identified numerous sources of inefficiency in some of the most profitable firms--firms that served as benchmarks by reference to their (profitability) criterion" (p. …