R&D and CEO turnover

This study examines the relationship between R&D investment and CEO turnover decisions based on the following stylized facts: (i) R&D influences firm performance, and (ii) the board determines CEO turnover based on firm performance. Using a theoretical framework that CEOs investing in a suboptimal level of R&D are more likely to be replaced, we argue that the relationship between R&D and CEO turnover varies depending on firms' innovative conditions and CEO tenures. Specifically, we find that the board's ex-ante expectations of R&D performance shaped by firms' innovative conditions moderate the relationship between R&D and CEO turnover, and that the sensitivity of this relationship tends to decrease along CEO tenures. Additionally, the proposed relationships appear to be more pronounced in firms that are more reliant on R&D compared to their industry competitors. Overall, these results suggest that R&D-induced CEO turnover decisions are largely influenced by the potential contributions of current R&D investment to firm performance. Therefore, a well-functioning monitoring process on R&D resource allocation and CEO turnover threats based on it can minimize agency problems and restore the optimal level of R&D investment, ultimately enhancing firm performance.