| Two percent of CEOs are fired per year on average. To evaluate this magnitude, I solve and estimate a dynamic model of forced CEO turnover. The model features costly turnover and learning about CEO ability. To rationalize the two percent firing rate, boards must behave as if replacing the CEO costs shareholders 5.9% of the firm's assets. This cost mainly reflects CEO entrenchment and poor governance rather than a real cost for shareholders. In terms of both direction and magnitude, the model helps explain the relation between CEO firings and tenure, profitability, and stock returns. |
