48 Pages Posted: 17 Apr 2012 Last revised: 4 Apr 2016
Date Written: March 12, 2016
This paper provides a cross-country analysis to determine whether CEO turnover is a credible disciplining device for managers, whether it is effective in delivering performance improvements, and whether better governance improves the credibility and effectiveness of CEO turnover. The analysis is based on a detailed panel of 5,300 CEO years and spans two distinctly different financial systems- the U.K. and Germany-over the period 1995-2005. We find that CEOs face a credible threat of being removed for underperformance and that the hiring of new CEOs is effective in realizing large profitability improvements in the following years. We also find both relations to be virtually identical in both countries, despite large structural governance differences. Further, we consider a large number of firm-specific governance mechanisms previously proposed as indicators of better governance and find no evidence that any of them improves the observed relations between firm performance and CEO turnover. Taken together, our results suggest that replacing the CEO is an important component of successful turnarounds in underperforming firms and that this economic mechanism appears to work in nearly identical ways across very different financial markets, and across firms with very different quality of governance.
Keywords: CEO, board, turnover, performance, restructuring
JEL Classification: G30, G34
Suggested Citation: Suggested Citation
Dimopoulos, Theodosios and Wagner, Hannes F., Corporate Governance and CEO Turnover Decisions (March 12, 2016). Swiss Finance Institute Research Paper No. 12-16. Available at SSRN: https://ssrn.com/abstract=2040690 or http://dx.doi.org/10.2139/ssrn.2040690
By Alex Edmans