CEO Dismissal : The Role of Investment Analysts

While poor firm performance has been shown to be an important predictor of CEO dismissal, financial performance alone cannot explain the increased incidence of CEO dismissal. The complex and ambiguous relationship between poor firm performance and CEO dismissal is due in part to the uncertainty that surrounds the board's evaluation of the firm's CEO. In this study, we propose that investment analysts, as legitimate third party evaluators of the firm and its leadership, provide certification as to the CEO's ability, or lack thereof, and thus help reduce the ambiguity associated with the board's evaluation of the CEO's efficacy. In addition, the board tends to respond to investment analysts because their stock recommendations influence investors, whom the board wants to appease. Using panel data on the S&P 500 companies for the 2000—2005 period, we find that negative analyst recommendations result in a higher probability of CEO dismissal. In addition, we find that the firm's prior financial performance moderates the effects of analyst recommendations on CEO dismissal. Finally, we find that the 2002 litigation against investment analysts led to a reduction in their credibility; consequently negative analyst recommendations had a weaker impact on CEO dismissal in the post-litigation period