The Effect of Missing Quarterly Earnings Benchmarks on Chief Financial Officer Turnover and Annual Bonus

We examine the effect of missing quarterly earnings benchmarks on Chief Financial Officer (CFO) turnover and compensation. We consider two well-known earnings benchmarks: 1) consensus analyst earnings forecast, and 2) earnings for the same quarter of the prior year. Our results are consistent with significant bonus and career consequences to CFOs of failure to meet quarterly earnings benchmarks. Our evidence suggests that missing one quarter of consensus analyst earnings forecast in the prior year increases the probability of CFO dismissal by 18.57%, after we control for established determinants of executive turnover. Overall, our findings provide evidence that missing earnings benchmarks has economically significant adverse consequences for a CFO's bonus compensation and future career. Further, we find that the effect of missing the consensus analyst forecast on CFO dismissal is more pronounced for firms with better governance, consistent with better-governed firms considering negative earnings surprise more seriously as a signal of poor performance. These adverse consequences create pressure for CFOs to manage or manipulate earnings in order to meet earnings targets. … Just after the IPO in 2000, Krispy Kreme replaced longtime Chief Financial Officer Paul Beitbach with newcomer John Tate … who was forced out as CFO of Williams-Sonoma after missing two quarterly earnings fore- casts. … Tate was promoted to Chief Operating Officer in 2002, and longtime controller Randy Casstevens was pro- moted to the top finance spot. Casstevens lasted less than eighteen months and turned in a "purely voluntary" resigna- tion just five months before the company's first quarterly earnings shortfall. To replace Casstevens, the company brought in Michael Phelan, a key member of the investment banking team that executed Krispy Kreme's IPO and follow- on offering, who in turn lasted less than two years in the