Why Good Managers May Stick to Bad Decisions - Internal Accounting Information, Managerial Turnover and Strategig Change

The connection between strategic change and managerial turnover is studied within a model where managers decide on a firm's strategy. Managers as well as firm owners care for the long-term success of a company. But managers are also interested in their own reputation. Due to reputational concerns managers may be reluctant to alter strategic decisions they themselves made in the past even when internal accounting information indicates that they should do so. It is shown that it may well be optimal in some cases to dismiss managers of higher ability and keep managers of lower ability as the latter may be more willing to act on internal accounting information and change past decisions.