Blown Away by Hurricane Katrina: The Impact of Exogenous Shocks on CEO Dismissals

We utilize natural exogenous shocks to contrast alternative theoretical mechanisms underlying CEO dismissal. Specifically, in the context of major natural disasters, we analyze forced CEO dismissals occurring in over 2,500 US companies over 19 years (1994 -- 2013). When contrasting existing theoretical explanations (e.g., natural shocks to have a zero effect because they are exogenous to CEO quality; natural shocks to have a negative effect because boards aim for internal stability during times of external instability, etc.), we identify a novel mechanism. Specifically, our results suggest that boards utilize shocks as a publicly visible excuse to legitimize dismissals--highly visible, high-stakes decisions that are often controversial. For example, we find that shocks' entire dismissal effect goes back to CEOs showing low pre-shock peer-adjusted performance (i.e., signaling low quality) or that different board compositions (differing in their degree of aiming for public acceptance) moderate our main effect.