Differences in Agency Problems between Public and Private Firms: Evidence from Top Management Turnover

Abstract

We compare a primary outcome of corporate governance, the propensity to replace poorly performing managers, between public and private firms in a large cross-country sample. We show that public firms are more likely to replace poorly performing managers than private firms. To identify the mechanisms driving this finding, we exploit cross-country variation in governance mechanisms, propensity score matching, changes in public/private status and a treatment-effects model. We find that the difference in governance outcomes stems from the governance mechanisms inherent in public equity markets, including the market for corporate control and information production and monitoring functions of stock markets. Our results suggest that financial markets may play an important role in limiting managerial entrenchment and mitigating governance problems in public corporations. Further, our results contribute to our understanding of the usefulness of earnings in decision-making outside of equity valuation.