Corporate Governance and CEO Turnover Decisions
University of Lausanne - School of Economics and Business Administration (HEC-Lausanne); Ecole Polytechnique Fédérale de Lausanne - Swiss Finance Institute
Hannes F. Wagner
Bocconi University - Department of Finance; Bocconi University - IGIER - Innocenzo Gasparini Institute for Economic Research
March 12, 2016
Swiss Finance Institute Research Paper No. 12-16
This paper provides a cross-country analysis to determine whether CEO turnover is a credible disciplining device for managers, whether it is effective in delivering performance improvements, and whether better governance improves the credibility and effectiveness of CEO turnover. The analysis is based on a detailed panel of 5,300 CEO years and spans two distinctly different financial systems- the U.K. and Germany-over the period 1995-2005. We find that CEOs face a credible threat of being removed for underperformance and that the hiring of new CEOs is effective in realizing large profitability improvements in the following years. We also find both relations to be virtually identical in both countries, despite large structural governance differences. Further, we consider a large number of firm-specific governance mechanisms previously proposed as indicators of better governance and find no evidence that any of them improves the observed relations between firm performance and CEO turnover. Taken together, our results suggest that replacing the CEO is an important component of successful turnarounds in underperforming firms and that this economic mechanism appears to work in nearly identical ways across very different financial markets, and across firms with very different quality of governance.
Number of Pages in PDF File: 48
Keywords: CEO, board, turnover, performance, restructuring
JEL Classification: G30, G34
Date posted: April 17, 2012 ; Last revised: April 4, 2016
© 2016 Social Science Electronic Publishing, Inc. All Rights Reserved.
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