Managerial Turnover and Performance in Outside Boards: Ownership Makes the Difference

Abstract

The paper examines the effectiveness of corporate governance mechanisms in a context characterised by fully outside boards. The internal governance mechanisms studied comprise CEO replacement, Board of Director's turnover and Chairman replacement in firms with ownership diversity. We find that corporate governance matters for improving performance. Our empirical findings indicate that, in privately-owned banks, forced Chairman departure followed by an outsider and the appointment of an outside CEO are seen as positive events. In addition, our results indicate that for non-private banks large board replacements are negatively related to future performance. Our study is conducted using a rich data set from the Costa Rican Central Bank for the period 1999-2004, and we carry out a regression analysis using the GMM technique in order to address endogeneity and firm-specific effects. The academic implications of these findings lay mostly in the strong support of the positive benefits that disciplinary mechanisms have on firm performance, since these events create the conditions for organisational change. Furthermore, these results suggest that ownership mattes, and more detailed information is needed to effectively evaluate the costs and benefits of governance interventions. This paper brings about important implications for policy-makers. Basically, our paper highlights the relevance of distinguishing governance interventions in shareholder and stakeholder-oriented banking firms.

Keywords: Corporate governance mechanisms, banks, ownership structure

JEL Classification: G21, G32, G34