Who Disciplines Management in Poorly Performing Companies?

Abstract

Who disciplines management of poorly performing firms? Four parties are considered: existing holders of large blocks of shares, investors acquiring new shareholdings, creditors and non-executive directors. This paper reports a comparative evaluation of the role of all four parties using a large sample of UK companies. Like the US, we find that there is a high level of executive board turnover in poorly performing companies but, contrary to US evidence, outside directors perform a weak disciplinary function and most outside owners of large share blocks exert little influence. Financial factors are important in the disciplining of management: high board turnover is closely linked to high levels of debt and to new equity finance in the form of distressed rights issues.

JEL Classification: G34