CEO Dismissals and Financial Restatements: The Role of Ethical Governance and Board Dynamics

Abstract

This study re-examines the relationship between CEO dismissals and financial restatements using a new, comprehensive dataset covering S&P 1500 firms from 2000 to 2018. This dataset offers several advantages over previous research: it provides precise data on CEO dismissals, enables large-sample analysis and includes detailed reasons for executive departures. Our findings confirm a positive relationship between financial restatements and CEO dismissals, with a heightened likelihood of dismissal in recent years reflecting increased board attention to ethical issues. Additionally, restatements are revealed to amplify the negative impact of weak financial performance on CEO turnover, as CEOs of poorly performing firms face a higher risk of dismissal after a restatement, whereas strong financial performance generally offers protection. Furthermore, we explore how board characteristics affect this relationship and reveal significant heterogeneity in board responses. Specifically, female board representation, directors’ financial expertise, CEO–board connections, directors’ experience with prior fraud incidents, and multiple directorships all moderate the likelihood of CEO dismissal following restatements. These findings provide new insights into the complex interplay among financial performance, ethical governance and board dynamics in CEO turnover decisions.