CEO turnover after product-harm crises

Abstract

Product-harm crises are discrete events in which product failures expose consumers to safety hazards. Firms facing such crises must legally recall their products to protect consumers from further harm. In this study, we examine the effects of product-harm crises and their recall strategies on CEO turnover. We find that firms are more likely to replace their CEOs after issuing product recalls, especially for recalls that are proactive and that offer extensive corrective actions. We further find that firms with poor performance and with limited financial flexibility are more likely to dismiss their CEOs after product recalls. Our study contributes to the disciplines of accounting, finance, and management by documenting product-harm crises are a strong predictor of CEO dismissal, that is, incremental to other measures of firm performance for U.S. companies.