Limits to Relative Performance Evaluation: Evidence from Bank Executive Turnover (WP 2008-3)

Abstract

This paper revisits the topic of relative performance evaluation (RPE) of top management using a large panel of community banks. We show that penalizing executives for poor performance arising from economic downturns is not necessarily inconsistent with the theory. Our empirical results indicate that weak downturn-linked performance is strongly related to increased executive turnover. Furthermore, this relationship is more pronounced in better-governed banks, which are more likely to engage in value-enhancing disciplinary actions. Our analysis suggests that executive dismissals during adverse economic conditions are not necessarily a result of bad luck; rather, the analysis implies that bad times are informative about management quality plans with hedge fund investments in 2006.

Authors

Irina Barakova and Ajay Palvia