By Dr. Jin Peng, Assistant Professor of Finance, University of Colorado Colorado Springs
In today’s fast-paced business environment, companies must constantly adapt to remain competitive. One significant way organizations respond to increased competition is through CEO turnovers. Research conducted by UCCS Assistant Professor Dr. Jin Peng, along with her collaborators, Haofei Zhang from Ningbo University of Technology and Mingming Zhou from Pace University, provides valuable insights into how unexpected tariff cuts – which increase industry competitiveness – influence CEO turnover rates, particularly in non-exporting firms.
Dr. Jin Peng and her team found that the likelihood of CEO turnover rises with unexpected surges in industry competitiveness, driven mainly by non-exporting firms. These firms, especially those with weak governance, high leverage and financial distress, are more prone to replacing their CEOs.
The researchers used industry-level tariff cuts as a quasi-natural experiment to capture increases in product market competition. The analysis covered 910 companies in 114 U.S. manufacturing industries from 1992 to 2012. Tariff cut shocks were measured as a dummy variable if they were at least three times larger than the industry average tariff change.
The findings indicate that tariff cuts positively affect firm CEO turnover decisions. Firms are more likely to replace their CEOs when the industry experiences a tariff reduction. This effect is confined to firms without export sales. Exporting firms, on the other hand, show increased exports and no significant changes in CEO turnover.
The study also revealed that the impact of tariff cuts on CEO turnover is particularly pronounced in firms with weak governance structures. These firms are more likely to replace their CEOs in response to increased competition, as they may struggle to adapt to the new competitive environment. Additionally, firms with high leverage or those in financial distress are more susceptible to CEO turnover after tariff cuts. This suggests financial stability and strong governance are crucial factors in a firm’s ability to navigate competitive shocks.
Furthermore, the research highlights exporting firms benefit from tariff reductions through increased overseas sales, which helps them balance the negative effects of heightened competition from foreign entrants. This dual effect explains why exporting firms do not exhibit significant changes in CEO turnover rates despite facing increased competition.
The level of product market competition directly affects firm CEO turnover decisions, depending on the firm’s ability to export and the strength of its corporate governance. These findings provide valuable guidelines for investors and governments:
- For Investors: Understanding the relationship between tariff cuts and CEO turnover can help investors anticipate changes in leadership and make informed decisions about their investments. Firms with weak governance, high leverage or financial distress are more likely to experience CEO turnover in response to increased competition.
- For Governments: When considering bilateral trade agreements and opening domestic markets to foreign competitors, governments should be aware of the potential impact on domestic firms. The research suggests that firms with strong corporate governance are better equipped to handle increased competition, while those with weaker governance may struggle and resort to CEO turnover as a coping mechanism.
Understanding how firms respond to competition shocks through CEO turnovers can help businesses and policymakers make informed decisions. Dr. Jin Peng’s research highlights the importance of strong corporate governance and the ability to adapt to changing competitive environments. To learn more about Dr. Jin Peng’s work and background, please visit https://business.uccs.edu/about/directory/faculty/jin-peng-phd
