Ownership Structure and Top Management Turnover

Abstract:     
We report a significant negative relation between the fractional equity ownership of top executives and the likelihood of top management turnover. In addition, the relation between prior firm performance and the likelihood of turnover is statistically insignificant for firms in which the top executive owns more than 1% of the firm's shares. These findings suggest that managers become entrenched at very low ownership levels. Consistent with this interpretation, we find that the stock price reaction to a management change is significantly greater in firms in which the departing manager owns more than 1% of the firm's shares. Moreover, in these firms, the incoming manager's fractional ownership is typically less than 1% and the firm is subject to a higher rate of post-turnover corporate control activity. We also examine the influence of other aspects of ownership structure and find that turnover rates are higher in firms with unaffiliated blockholders and lower in firms with blockholders that are affiliated with incumbent managers.

JEL Classification: G32, G34

working papers series