Industry Conditions and CEO Labor Markets: New Evidence on Relative Performance Evaluation

We study the role of industry conditions in the internal and external labor market for CEOs in a sample of over 60,000 firm-years from 1990-2007. Future job prospects of CEOs who separate from an employer are dependent on relative-to-industry stock performance, but not on industry stock performance, suggesting that new employers filter out industry stock returns in their evaluation of managerial talent. In the case of CEO turnover, we do not detect an independent role for industry stock returns in predicting turnover. This evidence suggests that a simple learning view of turnover with full relative performance evaluation and efficient information filtering is a reasonable description of CEO job allocation decisions with respect to stock returns. In the case of accounting measures of performance, we find a lack of full relative performance evaluation. Poorer industry accounting performance is associated with elevated rates of CEO turnover, an enhanced likelihood of hiring a firm outsider as a replacement, and, in some isolated models, poorer labor market prospects for a dismissed CEO. These accounting results are consistent with optimal job matching considerations. JEL Classification: G30; G31; G32