Fire the Manager to Improve Performance? Managerial Turnover and Incentives after Privatization in the Czech Republic

Abstract

This Paper analyses the effect of the introduction of managerial incentives and new human capital on enterprise performance after privatization in the Czech Republic. We find weak evidence for the presence of managerial incentives: only in 1997, three to four years after privatization, does poor performance significantly increase the probability of managerial change. Nevertheless, replacing the managing director in a newly privatized firm improves subsequent performance. This indicates that the privatized firms operate below potential under the incumbent management. We show that the institutional framework matters as well: managerial turnover improves performance only if the management is closely interconnected with the board of directors and thus holds effective executive authority.

Keywords: Privatization, managerial change, incentives, restructuring, corporate governance

JEL Classification: G32, G34, P31