The Effect of Ex-ante CEO Turnover Risk on Firms’ Discretionary Expenditures

Abstract

This study investigates whether CEOs' involuntary turnover risk affects their decisions on discretionary investment expenditures and the subsequent influence of those decisions on firms' actual turnover results. Using the sample of CEO turnover over the period 1993-2010, we find that managers facing ex-ante high, involuntary turnover risk are more likely than others to reduce research and development expenses and capital expenditures. These results imply that turnover risk induces CEOs' myopic decisions, which helps them to survive in the firm. However, those decisions on discretionary expenditures and actual turnover are likely to hurt firm value because firms keep low-ability managers and face consequences of myopic decisions that are detrimental to the firms in the long run.