CEO severance agreements and separation bonuses

The two essays comprising this dissertation examine the effect severance agreements on turnover and the discretionary payments to CEOs who left their roles during the period 1996 through 2004. The first essay examines the effect of ex ante severance agreements on the likelihood of turnover for these CEOs and finds that severance agreements can both encourage and discourage CEO turnover based on the quality of the CEO and recent firm performance and firm conditions prior to turnover. Specifically, severance agreements may act as a form of insurance for superior CEOs and mediocre CEOs appear to time their departure to maximize the value of their severance payments. The market timing on the part of the mediocre CEOs; however, does not appear to promote efficient, stockholder wealth maximizing behavior.;The second essay examines the determinants and market response to the discretionary payments made to CEOs following their departure. The findings suggest that payments made to CEOs who are forced to leave their positions and those who underperform their industries, but are allowed to leave voluntarily, are related to having an ex ante severance agreement in place and are otherwise consistent with rent extraction. The findings suggest that payments following forced turnover are often replacements for severance agreements and are otherwise a form of rent extraction. Payments following voluntary turnovers of underperforming CEOs are positively related to having a severance agreement and are otherwise generally indicative of rent extraction. Market reactions surrounding the date of turnover for the latter sample suggest that the market does not see the turnovers as efficient.