CEO Job Security and Firm Performance: An Empirical Study of the Effects of CEO Employment Contracts at the Time of a Financial Crisis

This paper examines the effects of CEO employment contracts on CEO job security and firm performance during the2007 financial crisis. Using a unique, manually collected dataset of employment agreementsfor CEOs of S&P 500 firms in office at the startof the financial crisis, I find that CEOs with (long) explicit employment contracts had greater job securityduringthe financial crisis, measured byCEO turnover rates,comparedto CEOs with relatively short employmentcontracthorizons.In theory, contractual protection against dismissal offered by (long)explicitemployment contracts may encourageCEOs to make value-enhancing long-term decisions. However, I find that firms with (long) explicitCEOemployment contracts performedworse during the financial crisiscompared to firms with relatively shortCEOemployment contract horizons.The findings suggestthat (long) explicit CEO employment contracts may offer a wrong type of job security that inducesperverse CEO incentives.Overall, thisstudy highlights the importance of contract design for incentive purposes.