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Limits to Relative Performance Evaluation - Evidence from Bank Executive Turnover

by Irina Barakova and Ajay Palvia

Abstract

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.

Disclaimer

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.

Availability

This Economics Working Paper (PDF 224KB) is available for viewing in Adobe's PDF format. The PDF viewer is available for download free from Adobe in versions for different platforms.