Ran Duchin

Interlocked Monitors: How Do Independent Directors Evaluate CEOs?

This paper studies the role of director-specific measures of firm performance in CEO turnovers. A firm’s weak performance-ranking relative to a director’s interlocked firms predicts greater attendance of board meetings and a higher likelihood of forced CEO turnovers. These findings hold in tests that control for standard firm performance measures, in tight specifications that include firm-by-CEO, firm-by-year, or director-by-year fixed effects, and in an instrumental-variable based framework that exploits common exposure to local economic shocks. We also provide consistent evidence from falsification tests that reshuffle interlocks. In the cross-section, the effects are stronger for more influential directors and in firms with higher performance uncertainty. Interlock-driven turnovers are followed by weaker performance and analyst downgrades – consistent with an availability bias. Overall, we provide some of the cleanest estimates, to date, that directors influence CEO turnovers by following individual performance heuristics, with consequences for the efficacy of CEO turnovers and firm performance.