Explaining Top Management Turnover in Private Corporations: The Role of Cross-Country Legal Institutions and Capital Market Forces
49 Pages Posted: 12 Jul 2013 Last revised: 11 Nov 2018
Date Written: December 3, 2016
Abstract
We find that the strength of countries’ legal institutions can explain the ability of private firms to identify and terminate poorly performing managers. This finding is consistent with our hypothesis that governance problems in private firms are ameliorated by strong institutions that reduce the incentives of controllers of private firms to retain poorly performing managers. Comparing private firms to their public counterparts, we find that private firms have a lower propensity to replace poorly performing managers than public firms do and that public firms’ exposure to capital market forces (the market for corporate control and stock market scrutiny) explains this difference. Overall, our findings support theoretical predictions that minority shareholders in privately held corporations might be especially vulnerable to expropriation and suggest that capital market forces play an important role in limiting managerial entrenchment.
Keywords: Corporate governance, agency problems, private and public ownership, management turnover
JEL Classification: G32, G34, G15
Suggested Citation: Suggested Citation