Do Institutions Have the Information to Play a Significant Role in Corporate Governance? Direct Evidence from Institutional Trading Around CEO Turnovers

Abstract

We use transactional level data on institutional trading around CEO turnovers to analyze the information flows and settings that allow information production and trading to act as an effective corporate governance mechanism. We find that institutional trading prior to a CEO turnover is positively related to the nature of a CEO turnover (forced versus voluntary). Further, institutions produce information partly by analyzing insider trading prior to a CEO turnover, though they are able to produce additional information independently as well. Trading by institutions after a forced CEO turnover with an insider as successor CEO is positively related to subsequent long-run stock returns, and realizes significant abnormal profits. Overall, our results are consistent with the notion that information production by institutions, and their trading making use of this information, is able to play an important corporate governance role in the setting of CEO turnovers.

Keywords: Corporate Governance; CEO Turnover; Institutional Trading; Information Production

JEL Classification: G23, G34