Who Disciplines Management in Poorly Performing Companies?
Julian R. Franks
London Business School; Centre for Economic Policy Research (CEPR); European Corporate Governance Institute (ECGI)
University of Oxford - Said Business School; Centre for Economic Policy Research (CEPR); European Corporate Governance Institute (ECGI)
Tilburg University - Department of Finance; European Corporate Governance Institute (ECGI); Tilburg Law and Economics Center (TILEC)
Journal of Financial Intermediation, Vol. 10, pp. 209-248, 2001
Who disciplines management of poorly performing firms? Four parties are considered: existing holders of large blocks of shares, investors acquiring new shareholdings, creditors and non-executive directors. This paper reports a comparative evaluation of the role of all four parties using a large sample of UK companies. Like the US, we find that there is a high level of executive board turnover in poorly performing companies but, contrary to US evidence, outside directors perform a weak disciplinary function and most outside owners of large share blocks exert little influence. Financial factors are important in the disciplining of management: high board turnover is closely linked to high levels of debt and to new equity finance in the form of distressed rights issues.
JEL Classification: G34Accepted Paper Series
Date posted: July 14, 2003
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