CEO Turnover in Private Equity Sponsored Leveraged Buyouts

Corporate Governance: An International Review, Vol. 19, No. 3, pp. 195-209, 2011

15 Pages Posted: 26 May 2011

See all articles by James Jianxin Gong

James Jianxin Gong

California State University at Fullerton

Steve Yuching Wu

University of Illinois at Urbana-Champaign

Date Written: October 27, 2010

Abstract

Research Question/Issue: We examine the governance role of private equity (PE) firms in post-LBO companies in the USA. We propose and test whether PE firms remove entrenched CEOs or CEOs who cause agency problems.

Research Findings/Insights: Using archival data from a sample of 126 PE sponsored LBOs in the USA between 1990 and 2006, we document a CEO turnover rate of 51 percent within two years of an LBO announcement. We find that the boards of directors replace CEOs in companies with high agency costs, as measured by low leverage and a high level of undistributed free cash flow. In addition, unlike the boards of directors in public companies, the boards in post-LBO companies tend to replace entrenched CEOs. Finally, the boards are more likely to replace CEOs if pre-LBO return on assets is low.

Theoretical/Academic Implications: According to the agency theory, a PE-sponsored LBO is a new organizational form that reduces agency costs by enhancing corporate governance. This study uses CEO turnover as a setting to test that prediction. We find that PE firms replace CEOs who can cause agency problems, thus providing empirical support for the proposition that PE firms improve corporate governance in LBO companies.

Practitioner/Policy Implications: This study offers insights to policy makers who are interested in regulating PE firms. Our results suggest that, in the USA, PE firms provide effective corporate governance mechanisms by replacing incompetent and entrenched CEOs. In addition, our results provide a set of factors for PE firms to consider when they make CEO retention decisions.

Keywords: Corporate Governance, Private Equity, Leveraged Buyout, CEO Turnover

Suggested Citation

Gong, Jianxin and Wu, Steve Yuching, CEO Turnover in Private Equity Sponsored Leveraged Buyouts (October 27, 2010). Corporate Governance: An International Review, Vol. 19, No. 3, pp. 195-209, 2011, Available at SSRN: https://ssrn.com/abstract=1851603

Jianxin Gong (Contact Author)

California State University at Fullerton ( email )

Department of Accounting
Mihaylo College of Business and Economics
Fullerton, CA 92831
United States
(657)278-3897 (Phone)
(657)278-4518 (Fax)

Steve Yuching Wu

University of Illinois at Urbana-Champaign ( email )

601 E John St
Champaign, IL 61820
United States

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