Spring 2021 Buffalo Business 21
How a company's
consistent
earnings can
get a CEO fired
When a corporation's earnings are
steady, its board of directors is more likely
to fire their CEO aer a bad earnings
period, according to new School of
Management research.
Published in Management Science,
the study analyzed corporate earnings
persistence—whether or not earnings are
expected to recur or not—and how it impacts
CEO turnover.
"Firms with high earnings persistence
understand that the
performance in the
current period is likely
to carry forward with
the incumbent CEO, so
they're more likely to
fire a CEO who yields
poor earnings," says
Inho Suk, associate
professor of accounting and law. "In
contrast, boards of firms with low earnings
persistence are less likely to fire a CEO
with a poor performance because it's
likely temporary."
The researchers
analyzed data of more
than 1,500 CEO turn-
overs from 1993-2017,
measuring earnings
performance by in-
dustry-adjusted return
on assets (IAROA), with
the three-year average
of IAROA, industry-adjusted ROA changes
and non-Generally Accepted Accounting
Principles earnings as alternative measures.
Their results show that earnings
persistence is the most direct and dominant
earnings attribute in explaining CEO
turnover decisions.
"Compared to CEO compensation,
turnover decisions have longer-term
consequences on firm performance and
corporate policies," says William Kross,
professor of accounting and law. "Failure
to replace a poorly performing CEO, or to
retain a CEO with potential, is the costliest
manifestation of agency conflicts."
Suk and Kross collaborated on the
study with Seung Won Lee, assistant professor
of accounting in the Penn State Harrisburg
School of Business Administration.
Suk Kross
In fundraising, listen to your
donors—not the experts
"When attempting
to predict which
solicitation will
resonate with your
donors, it turns out
there's no substitute
for the real thing.
We recommend
organizations test
new fundraising ideas with a small
group of their own donors before full
implementation, as the information you
gather will far outweigh any minimal
costs from the test appeal."
— Indranil Goswami, assistant professor
of marketing, on his study showing that
in-context field tests better predicted how
an organization's donors would react to its
charitable appeals than academic models
or expert advice. The research appeared
in Marketing Science. Read more at bit.ly/
goswami-study.
Goswami
