CEO Turnover and Takeover Threats: New Evidence from Antitakeover Legislation

Abstract

To understand the interaction between internal control mechanisms and the market for control, using a difference-in-difference methodology, we examine CEO turnover following an exogenous decline of takeover threats---second generation of antitakeover legislation in the U.S. Different from previous research using only time series variation in CEO turnover, it is shown that, compared to a control group, the sensitivity of CEO turnover to performance increased for the firms affected by the laws. The increases are both statistically and economically significant. We also find that the increases in the sensitivity of CEO turnover to performance are concentrated in the firms with stronger board monitoring. Our results suggest that internal control mechanisms and the market for control may be substitutes instead of complements.

Keywords: CEO turnover, takeover, antitakeover legislation, corporate governance

JEL Classification: G30, G34, G38