Monitoring Managers: Does it Matter?

61 Pages Posted: 26 Jun 2013

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: December 2011

Abstract

We document how gathering ‘hard’ and ‘soft’ information helps boards of directors to learn a CEO’s ability over time; test under what circumstances boards fire CEOs; and show that such interventions lead to improved firm performance. Our empirical design exploits detailed hard information about performance relative to pre-agreed, firm-level targets and soft information reflecting the board’s views of CEO actions, CEO decisions, and CEO competence coupled with plausibly exogenous variation due to the staggered adoption of corporate governance laws in formerly Communist countries between 1993 and 2010. We find that CEOs are fired when a firm underperforms its targets and, especially, when evidence has mounted that they are incompetent, but not when poor performance reflects factors deemed explicitly to be beyond their control or for making ‘honest mistakes.’ The level of CEO turnover increases following corporate governance reforms that increase board power, as does the sensitivity of CEO turnover to soft information relative to that of hard information. Following forced CEO turnover, firms see performance improvements and their investors are considerably more likely to eventually sell them at a profit.

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

Suggested Citation

Cornelli, Francesca and Kominek, Zbigniew W. and Ljungqvist, Alexander, Monitoring Managers: Does it Matter? (December 2011). NYU Working Paper No. 2451/31350. Available at SSRN: https://ssrn.com/abstract=2284658

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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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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Sweden

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