Who Stays? The Moderating Role Of Past Performance On Executive Turnover Following Misconduct

Recent studies have documented that firms with corporate misconduct tend to replace their executives in order to repair their legitimacy. However, we know little about how the firm’s past (good) performance may protect the executives in the context of corporate misconduct. In this study, we propose and find that the likelihood of executive (both CEO and non-CEO executive) turnover is positively related with the degree of severity of the corporate misconduct. Moreover, we find that past good performance, both accounting and stock performance, can mitigate the effect of severity of corporate misconduct on CEO’s turnover, but not on non-CEO executive turnover. These findings provide insights on how firms may balance the legitimacy concern and the cost concern in their responses to corporate misconduct and accordingly decide whether to replace executives and more specifically whom to replace.