Young Firm Manager Turnover and Performance

Abstract

This paper investigates the impact of manager turnover on the performance of young firms and examines the variation of this impact across firms with different ownership and control structures. Using a novel manager-shareholder matched dataset of young firms in the United Kingdom, I exploit shocks to managers' outside options induced by an area-based policy in support of local businesses. To disentangle the causal impact of manager departures from policy spillover effects, I compare firms with different ex-ante manager departure likelihood and different distance to policy regions. I find that manager departure has a significant negative causal impact on the subsequent performance of young firms. Moreover, manager departure leads to a substantial decline in the assets of founder-managed firms and a significant increase in bankruptcy risks of non-founder-managed firms. My findings suggest that managers have important human capital and that replacement frictions are substantial in young firms. The heterogeneous causal impact supports the existence of founders' private benefits of control and their tight linkages with firms.