Executive migration: How information cues from departing firms and the labor market affect shareholder value

• DOI: http://doi.org/10.1111/corg.12243
• Published date: 01 July 2018
• Date: 01 July 2018
• Author: Sarfraz Khan,Rachana Kalelkar,Stewart R. Miller,Wm. Gerard Sanders

EMPIRICAL

Executive migration: How information cues from departing

firms and the labor market affect shareholder value

Sarfraz Khan

1

|Rachana Kalelkar

2

|Stewart R. Miller

3

|Wm. Gerard Sanders

3

1

University of Louisiana, Lafayette, Lafayette,

LA 70504, USA

2

University of Houston‐Victoria, Sugar Land,

TX 77479, USA

3

The University of Texas –San Antonio, San

Antonio, TX 78249, USA

Correspondence

Stewart R. Miller, The University of Texas –

San Antonio, San Antonio, TX 78249, USA.

Email: stewart.miller@utsa.edu

Abstract

Manuscript Type: Empirical.

Research Question/Issue: This study examines the extent to which newly‐hired

migrating executives affect shareholder reaction at their arriving firms. We draw upon

the information economics and upper echelons literatures to explain how (1) deviant

behavior and ability information cues from an executive's “departing”firm contribute

to shareholder value at the “arriving”firm and how (2) labor market information cues

moderate these relationships.

Research Findings/Insights: We use event study methodology to determine

investors' reactions to the hiring announcements. We test our framework with a

sample of 268 chief financial officers who migrated between 2002 and 2014.

Controlling for sample selection and endogeneity, we find that a financial restatement

at the migrating executive's departing firm adversely affects shareholder reaction at

the arriving firm, and the effect is stronger when the migration is recent (i.e., within

one year). An extended analysis reveals an interaction between departing firm

financial restatement and departing firm financial performance.

Theoretical/Academic Implications: Our study contributes to the literature by the-

orizing and showing that investors screen by using information cues from migrating

executives' departing firms when signals are not salient in order to determine their

contributions to shareholder reaction at arriving firms. Investors react negatively to

deviant behavior information cues from the departing firms of newly hired executives.

Also, the framework explains the moderating effect of labor market information cues

—investors react unfavorably to deviant behavior information cues when they involve

same‐year executive migrations.

Practitioner/Policy Implications: Our study suggests that investors and hiring firms

have divergent views on the value added of deviant behavior, yet convergent views

on the value added from executive abilities.

KEYWORDS

Corporate Governance, Executive Migration, Information Cues, Shareholder Reaction, Upper

Echelons

Received: 5 February 2017 Revised: 9 April 2018 Accepted: 12 April 2018

DOI: 10.1111/corg.12243

Corp Govern Int Rev. 2018;26:293–308. © 2018 John Wiley & Sons Ltdwileyonlinelibrary.com/journal/corg 293

1|INTRODUCTION

“Humans do not start fresh each day, but carry the

baggage of previous interactions into each new one.”

(Granovetter, 1992: 34)

Given the importance of executives to firm performance

(Geletkanycz & Hambrick, 1997), there has been growing scholarly

attention paid to changes in the executive suite (e.g., Arthaude‐Day,

Certo, Dalton, & Dalton, 2006; Cannella & Shen, 2001; Daily & Dalton,

1995; Kesner & Sebora, 1994). Although many studies focus on exec-

utive succession within a particular firm, a growing body of knowledge

has examined executive migration (Boeker, 1997; Kraatz & Moore,

2002; Rao & Drazin, 2002; Sørensen, 1999), which Boeker defined

as “the movement of top managers across organizations”(1997: 213).

One understudied aspect of this literature is the extent to which a

migrating executive actually enhances shareholder value at the arriving

firm. From an investor's perspective, assessment of a migrating

executive's contribution to shareholder value at an arriving firm can be

problematic due to information asymmetry. Many studies have exam-

ined signals, whereby firms undertake actions that are costly to imitate

in order to convey their high quality to, and reduce information asym-

metry with, investors. Absent signals, some scholars have asserted that

information cues, which have been defined as “observable secondary

information sources,”can help investors distinguish the quality of firms

(Sanders & Boivie, 2004: 168). Examples of observable secondary infor-

mation sources include venture capital ownership, institutional owner-

ship, executive ownership, and board composition information that

were obtained from proxy statements to reflect corporate governance

(Sanders & Boivie, 2004). We contend that information cues help inves-

tors to infer the quality of executives and, in turn, migrating executives'

contributions to shareholder value at arriving firms. Indeed, Boeker

asserted, “the background and expertise that top managers bring from

other organizations constitute a critical and potentially unique resource

that is likely to have an important effect on future strategic actions”

(1997: 214). More recently, Gomulya and Boeker (2014) highlighted

the importance of a successor's experience, especially in the presence

of a severe financial restatement at the hiring firm. However, the litera-

ture has overlooked information cues from the migrating executive's

departing firm that may shed light on the focal executive's contribution

to shareholder value at the arriving firm.

Prior studies have asserted that the labor market provides infor-

mation about job candidates (Vishwanath, 1989). The recruitment of

managerial talent from other firms can help overcome resource defi-

ciencies, enhance innovativeness and stimulate business development

(Boeker, 1997; Rao & Drazin, 2002). However, negativity bias—a focus

on more recent negative events—may make negative information

about a firm and/or its top managers more salient to investors. Specif-

ically, the executive migration gap may affect information cues, thus

enabling investors to refine their assessments of a migrating

executive's contribution to shareholder value at the arriving firm.

Due to these understudied aspects of executive migration, we

seek to answer the following two‐part question: “To what extent do

deviant behavior and ability‐based information cues from a migrating

executive's departing firm affect shareholder reaction at the arriving

firm?”“To what extent do labor market information cues—namely, the

executive migration gap—moderate the effects of departing firm informa-

tion cues?”To answer this two‐part research question, we develop a

theoretical framework that employs information economics and psy-

chology arguments to explain how departing firm information cues

and labor market information cues associated with a migrating exec-

utive affect shareholder reaction at an arriving firm. Specifically, we

focus on how information cues at a migrating executive's departing

firm may convey deviant behavior (Robinson & Bennett, 1995) and

ability to investors at the arriving firm. Then, we probe deeper into

the boundary conditions of these departing firm information

cues by examining the implications of an executive's migration gap

(i.e., the elapsed employment gap for the migrating executive).

By answering this two‐part research question, our study contrib-

utes to the literature in the following ways. First, we theorize and show

that investors use information cues from migrating executives'

departing firms when signals are not salient in order to determine their

contributions to shareholder value at arriving firms. Whereas prior

research focused on different forms of experience of the successor

executive (Gomulya & Boeker, 2014),

1

we theorize that deviant behav-

ior information cues as reflected by departing firm financial restatements

and ability information cues as captured by departing firm financial per-

formance affect shareholder reaction at the arriving firm of the migrat-

ing executive. Our Heckman results reveal that shareholder reaction at

the arriving firm is influenced by a migrating executive's deviant behav-

ior and ability based‐information cues. Our theoretical framework also

explains boundary conditions for these information cues. Specifically,

we theorize and show that the executive's migration gap has an impor-

tant moderating effect. That is, we provide some evidence that

departing firm financial restatement influences arriving firm perfor-

mance, especially for same‐year migration. Our extended analysis also

reveals an interaction between departing firm financial restatement and

departing firm financial performance. Our study can explain the hiring

of tainted executives and the implications of such decisions. These

aspects of our study extend Boeker's (1997) work on how executive

migration, top management team (TMT) tenure, TMT heterogeneity,

and TMT size affect product market entry and Gomulya and Boeker's

(2014) research on the role of prior experience of migrating executives.

In addition, it explains how investors react to other information cues

—departing firm information cues and labor market information cues

—thus extending Sanders and Boivie (2004).

Lastly, prior work on executive turnover has focused on chief exec-

utive officers (Gomulya & Boeker, 2014). However, we test our hypoth-

eses using a sample of chief financial officer (CFO) migrations. CFOs

play an important role in establishing high‐level financial policies and

procedures and ensuring that these policies are being followed (see

Ernst & Young Survey of CFO, 2011). Section 302 of Sarbanes‐Oxley

(SOX) requires that both CEO and CFO certify the veracity of financial

statements, with both being subject to criminal liability for “willfully”

certifying statements that fail to comply with the requirements.

Existing literature finds that CFOs are more influential than CEOs

in decisions where financial sophistication is required (Jiang, Petroni, &

Wang, 2010). Both regulators' views and empirical evidence indicate

that CFOs are paramount to protecting shareholders. Additionally,

Mian (2001) documents that CFOs are held responsible for poor

294 KHAN ET AL.