Connections or Performance: What Determines Turnover of Bankers?
38 Pages Posted: 11 Sep 2008
Date Written: July 31, 2008
We study top executive turnover in Italian Banks for the period 1993-2001. We relate the probability of survival of top executives (President, CEO, General Manager) to bank performance and local connections of the manager, controlling for (observable and unobservable) bank and manager characteristics by exploiting longitudinal information on bank-manager appointments. We measure the degree of local connections of managers by the distance between the province of the bank headquarter and the province of birth of the manager, so that higher distance implies lower connections. We show that top managers of Italian banks tend to be local in the sense that the distribution of the distance is heavily skewed towards zero. Moving from this evidence, we address two questions. First, we investigate whether connections affect the duration of the appointment at bank. Second, we ask whether connections entrench managers at the expense of bank performance. We find that connections generally increase survival probabilities at bank and that the positive effect of performance (which has been largely documented by executive turnover literature) is weakened once connections are accounted for. We find only very weak evidence in favour of the hypothesis that managerial connections contain valuable information to help bank performance. Our evidence instead points in the direction that connections are a collusion device to maintain and share rents and lower the probability of survival of the bank. Consistently with this we find that the only ones to benefit from connections are the top managers themselves whose survival probability (for Presidents and General Managers) significantly increases with connections.
Keywords: Corporate Governance, Executive Turnover, Commercial and Cooperative banks
JEL Classification: G21, G34
Suggested Citation: Suggested Citation