Terrorist Attacks and CEO Turnover

Abstract

Threat of dismissal is an implicit incentive to the CEO and it should be sensitive to firm performance when signal to noise ratio of performance measure is high. Terrorist attacks are exogenous shocks to firm performance that increase noise, which provides a natural experiment to test whether the board filters out the noise unrelated to the unobservable talent of the CEO by lowering the turnover performance sensitivity. Using the Execucomp data from 1992 to 2016 and UMD Terrorist attack data, we find supporting evidence for our hypothesis. In addition, for a subsample until 2009, we find that the reduction of performance sensitivity is more salient for the CEOs with stronger mobility in the labor market but not as much for more powerful CEOs.