Limits to Relative Performance Evaluation - Evidence from Bank Executive Turnover
by Irina Barakova and Ajay Palvia
This paper revisits the topic of relative performance evaluation (RPE) of top management using a large panel of community banks. We show that penalizing executives for poor performance arising from economic downturns is not necessarily inconsistent with the theory. Our empirical results indicate that weak downturn-linked performance is strongly related to increased executive turnover. Furthermore, this relationship is more pronounced in better-governed banks, which are more likely to engage in value-enhancing disciplinary actions. Our analysis suggests that executive dismissals during adverse economic conditions are not necessarily a result of bad luck; rather, the analysis implies that bad times are informative about management quality.
Any whole or partial reproduction of material in this paper should include the following citation: Irina Barakova and Ajay Palvia, "Limits to Relative Performance Evaluation: Evidence from Bank Executive Turnover," Office of the Comptroller of the Currency, Economics and Policy Working Paper 2008-3, March 2010.