Crash and Burn: Investor Perceptions of CEO/CFO Dismissal Following a Stock Price Crash

Prior studies on the consequences of executive dismissal following a performance failure on investor reactions are contradictory. However, the literature has been silent on whether and how the actual responsibilities of the dismissed executives studied could influence investor reactions. Drawing on signaling theory and role theory, we examine how CEO dismissal and CFO dismissal following a stock price crash might be differentially perceived by investors as distinct executive roles. We propose that the fit between a dismissed executive’s role (CEO versus CFO) as a signal of blame, and the specific circumstances surrounding a stock price crash failure, will be fundamental in shaping investor reactions. We find support for our theorizing across two studies. Study 1 is an archival study of U.S. firms spanning the period 1992—2014 that comprised 29,242 firm-year observations. Study 2 is an experiment that conceptually replicates our first study to address causality concerns using two samples: 820 participants with investment experience and 297 professional investors. Our findings indicate that executive role, and the fit between role and circumstances of failure, are important considerations when using executive dismissal to restore investor confidence.