While import tariff cuts can be a boon for foreign parties in a market, it comes with negative consequences for domestic firms that can extend all the way to replacing the CEO.
The entry of foreign competitors to domestic companies happens when the tariff cuts create an opening into the market, adding to the pool of contenders within an industry. As a response to this, domestic firms react to improve efficiency and stay competitive, often by reevaluating what is needed from a CEO and if the current one needs to be replaced.
As the study notes, “When the environment becomes more competitive, match quality of the current CEO and the firm may decrease. The current CEO may no longer be a suitable leader for the firm in this new and competitive environment, as domestic firms may need a more aggressive CEO.”
To study these effects, UCCS finance assistant professor Jin Peng, Ph.D., and her co-authors looked at the effect of import tariff cuts on CEO turnover decisions for 910 companies in 114 U.S. manufacturing industries from 1992 to 2012 in their paper “CEO turnovers as organizational responses to shocks in competition.”
The authors approached the study with hypotheses that tariff cuts increase the likelihood of CEO turnovers, that this increase is concentrated in firms that have poor corporate governance or high leverage, or are under financial strain, and in firms that do not export products.
Most results were consistent with the hypotheses, finding that a firm is 3.8% more likely to change its CEO after an unexpected increase in product market competition, whether it be a forced or voluntary replacement. Exporting firms did not face the same strains or turnovers results, as they may not face any increase in competition with the counterbalance provided to them from entering foreign markets as the domestic market is shaken up. Additionally, the trend showed that firms engaging in the CEO turnover were more likely to have weak governance or financial distress, aligning with these hypotheses as well.
“Overall, this paper provides a guideline for investors on what to expect in terms of firm CEO turnover in the face of competition environment changes,” the authors conclude. “The results also serve as additional insights for governments to consider when passing a bilateral trade agreement in terms of the effects that opening the domestic market to foreign competitors has on domestic firms.”
This work also adds to the literature around CEO turnover (both voluntary and forced) research, corporate governance and industrial organization, firms’ responses to tariff cuts based on their financial condition and the impact of tariff cuts to the CEO turnover.
Peng’s co-authors for this study include Haofei Zhang, Ph.D., Assistant Professor at Nankai University; and Mingming Zhou, Ph.D., a former UCCS associate professor who now teaches at the Lubin School of Business at Pace University. This research project is funded by Ningbo University of Technology.
Read “CEO turnovers as organizational responses to shocks in competition” in its entirety online.