Earnings Surprises and Uncertain Managerial Ability: Evidence from CEO Turnovers

Shane Dikolli
Duke University

William Mayew
Duke University

DJ Nanda
Duke University

Abstract:
We document that the likelihood of CEO turnover increases in the number of past negative quarterly earnings surprises, measured relative to both past earnings and analysts’ forecasts. This relation declines over a CEO’s tenure, consistent with accounting earnings revealing information about uncertain managerial ability. Further, CEO tenure affects firm governance characteristics: tenure is positively associated with board independence, lack of CEO-chair duality and CEO ownership. However, governance characteristics do not meaningfully affect the earnings surprise-turnover relation. Results suggest that periodic earnings reports resolve uncertainty about CEO ability, and tenure reflects uncertainty in CEO ability that affects firms’ monitoring choices.