Monitoring Managers: Does it Matter?

52 Pages Posted: 11 Jan 2010

See all articles by Francesca Cornelli

Francesca Cornelli

London Business School; Centre for Economic Policy Research (CEPR)

Zbigniew W. Kominek

European Bank for Reconstruction and Development (EBRD)

Alexander Ljungqvist

New York University (NYU) - Department of Finance; National Bureau of Economic Research (NBER); Centre for Economic Policy Research (CEPR); European Corporate Governance Institute (ECGI); Research Institute of Industrial Economics (IFN)

Multiple version iconThere are 5 versions of this paper

Date Written: November 2009

Abstract

We test under what circumstances boards discipline managers and whether such interventions improve performance. We exploit exogenous variation due to the staggered adoption of corporate governance laws in formerly Communist countries coupled with detailed hard information about the board's performance expectations and soft information about board and CEO actions and the board's beliefs about CEO competence in 473 mostly private-sector companies backed by private equity funds between 1993 and 2008. We find that CEOs are fired when the company underperforms relative to the board's expectations, suggesting that boards use performance to update their beliefs. CEOs are especially likely to be fired when evidence has mounted that they are incompetent and when board power has increased following corporate governance reforms. In contrast, CEOs are not fired when performance deteriorates due to factors deemed explicitly to be beyond their control, nor are they fired for making 'honest mistakes.' Following forced CEO turnover, companies see performance improvements and their investors are considerably more likely to eventually sell them at a profit.

Keywords: boards of directors, CEO turnover, Corporate governance, large shareholders, legal reforms, private equity, transition economies

JEL Classification: G24, G32, G34, K22, O16, P21

Suggested Citation

Cornelli, Francesca and Kominek, Zbigniew W. and Ljungqvist, Alexander, Monitoring Managers: Does it Matter? (November 2009). CEPR Discussion Paper No. DP7571. Available at SSRN: https://ssrn.com/abstract=1533176

Francesca Cornelli (Contact Author)

London Business School ( email )

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Centre for Economic Policy Research (CEPR)

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Zbigniew W. Kominek

European Bank for Reconstruction and Development (EBRD) ( email )

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Alexander Ljungqvist

New York University (NYU) - Department of Finance ( email )

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HOME PAGE: http://pages.stern.nyu.edu/~aljungqv

National Bureau of Economic Research (NBER) ( email )

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Centre for Economic Policy Research (CEPR)

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European Corporate Governance Institute (ECGI)

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Research Institute of Industrial Economics (IFN) ( email )

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Stockholm, SE-102 15
Sweden

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