Assuming that the board isn't certain of hiring the best candidate, lots of space at the top is going to make any individual companies' talent pool worse by ensuring that other companies snag some of the best available talent for their own vacancies.

This selection problem (and your argument about signalling) might partly explain why larger companies are more willing to fire and loss-making companies are apparently no more likely to fire than profitable ones - a loss-making small company is much less confident in their ability to hire an outstanding replacement than a profit-making larger company with a board perceived as trigger-happy.