A research seminar by Dr. Jaideep Chowdhury, Department of Finance and Business Law at the James Madison University, U.S.A was held on July 07, 2022.
Topic – Optimistic Directors and CEO Turnover
Abstract of the research paper on which the seminar was based
In this study, we investigate the effect of optimistic directors on the board on forced CEO turnover. We provide strong evidence that the likelihood of CEO turnover is lower in firms with optimistic boards and that turnover-performance-sensitivity decreases in firms with optimistic directors on board. We find that optimism is not a personal trait of the directors. Directors can be optimistic in one firm and not in another firm. Optimism is director-firm-year specific. Overconfidence is a personal trait. Our paper illustrates the difference between overconfidence and optimism. We further find that CEO turnover-performance-sensitivity is mitigated by directors’ optimism in firms with high short-interest ratios, suggesting the distinctive views held by short-sellers and optimistic directors on firms’ prospects. Firms with optimistic directors perform better after CEO turnover and also without CEO turnover compared to comparable firms without optimistic directors. Firms with optimistic directors recovered faster in terms of idiosyncratic firm stock return and ROA after the terrorist attacks of 9/11/2011 and 2008-2009 financial crisis. Directors’ trade-level profitability is higher for optimistic directors. This is the first study in the literature that examines the role of a director’s optimism in CEO turnover decision-making.