Management Turnover Across the Corporate Hierarchy

We study management turnover in the set of top 5 executives for a sample of 443 large firms from 1993-1998. Using information from news articles and severance disclosures in proxy statements, we find that the rate of forced turnover for non-CEOs is at least as great as the rate for CEOs, but the sensitivity of turnover to aggregate firm performance is relatively smaller for non-CEOs. The probability that a non-CEO leaves office is highly elevated around CEO dismissals, particularly when the replacement CEO is an outsider. We find that the labor market penalties from a job dismissal are quite severe for both CEOs and non-CEOs. While many dismissed executives gain new employment in an executive capacity, on average their new positions appear to be significantly inferior to their old positions as measured by compensation, seniority, and firm size. Our results suggest that: (1) the turnover process is effective at eliminating lower ability managers across the corporate hierarchy, (2) aggregate firm performance is a less informative signal of ability for executives below the CEO, and (3) the management team is evaluated, at least partially, as a team. JEL Classification: G32; G34; J33; J41