Investor Protection and Corporate Governance: Evidence from Worldwide Ceo Turnover

64 Pages Posted: 21 Aug 2003

See all articles by Mark L. DeFond

Mark L. DeFond

University of Southern California - Leventhal School of Accounting; European Corporate Governance Institute (ECGI)

Mingyi Hung

Hong Kong University of Science & Technology (HKUST)

Abstract

Recent research asserts that an essential feature of good corporate governance is strong investor protection, where investor protection is defined as both (1) the extent of the laws that protect investors' rights and (2) the strength of the legal institutions that facilitate law enforcement. The purpose of this study is to test whether the two components of investor protection are associated with an important role of good corporate governance: identifying and terminating poorly performing CEOs. Our tests find no relation between CEO turnover and firm performance in countries with extensive laws protecting investors. However, we find that CEO turnover is associated with poor firm performance in countries with strong law enforcement institutions. We also find that in countries with strong law enforcement, CEO turnover is associated with poor stock returns when stock prices are more informative, and with poor earnings otherwise. Further, our findings are robust to controlling for the influence of public opinion, the effects of block-holders, the level of financial market development, a country's legal origin, and several alternative research design specifications.

Our results suggest that strong law enforcement institutions are important in fostering corporate governance mechanisms that eliminate unfit CEOs, but that extensive laws are not. This finding is consistent with: (1) limited investor protection laws being capable of cultivating good corporate governance as long as law enforcement institutions are strong; and (2) insiders (including directors and CEOs) in countries with weak law enforcement being more likely to engage in collusive behavior to expropriate shareholder wealth, thereby reducing directors' incentives to dismiss poorly performing CEOs. More generally these findings suggest that good corporate governance requires law enforcement institutions capable of protecting shareholders' property rights (i.e. protecting shareholders from expropriation by insiders), but does not require extensive shareholder protection laws.

Keywords: International corporate governance, investor protection, stock price informativeness

JEL Classification: G3, K0, M4

Suggested Citation

DeFond, Mark and Hung, Mingyi, Investor Protection and Corporate Governance: Evidence from Worldwide Ceo Turnover. Journal of Accounting Research, Forthcoming, Available at SSRN: https://ssrn.com/abstract=367020 or http://dx.doi.org/10.2139/ssrn.367020

Mark DeFond

University of Southern California - Leventhal School of Accounting ( email )

Accounting Building, Room 206
Los Angeles, CA 90089-0441
United States
213-740-5016 (Phone)
213-747-2815 (Fax)

European Corporate Governance Institute (ECGI) ( email )

c/o the Royal Academies of Belgium
Rue Ducale 1 Hertogsstraat
1000 Brussels
Belgium

Mingyi Hung (Contact Author)

Hong Kong University of Science & Technology (HKUST) ( email )

Clearwater Bay
Kowloon, 999999
Hong Kong

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