This paper shows that stock mispricing affects the probability of CEO turnover. A 10% decline in firm’s market value triggered by an uninformative stock price shock increases the likelihood of CEO turnover by 5%-11%. This effect is stronger for firms with a large fraction of independent directors, and a quasinatural experiment further supports that finding. In line with extant models of director reputation: (i) boards whose independent directors are concerned about the labor market respond the most to mispricing; (ii) independent directors responding to mispricing are rewarded on the labor market; (iii) independent directors trade against mispricing.

JEL Classification: G14, G30, M12
Keywords: board of directors, CEO turnover, market inefficiency, stock mispricing​