CEO Change Research Articles

The effect of investor protection on forced CEO turnover

PurposeThis paper aims to analyze the direct and indirect effects of investor protection on forced CEO turnover.Design/methodology/approachThe authors investigate 5,175 firm-year observations from 16 European countries over 2012–2018, collect data on four national investor protection indicators, identify 196 forced CEO turnovers and use multiple logistic regression models.FindingsThe results show that a reduction in the degree of investor protection significantly increases the probability of a forced change of the company’s CEO. Furthermore, when the degree of investor protection increases, directors are attributed a lower degree of responsibility in the event of a decline in earnings performance. Therefore, the relation between a decrease in profitability and a forced change of CEO is reduced.Research limitations/implicationsThe research is focused on countries belonging to the European Economic Area and most of the investor protection indicators are derived from surveys. Concerning policy implications, the findings suggest that regulators should focus on the effective enforcement of investor protection mechanisms.Social implicationsThe results confirm that characteristics at the country level have an impact on corporate decisions, highlighting the importance of increasing the degree of investor protection as a means of mitigating agency conflicts and improving stewardship.Originality/valueTo the best of the authors’ knowledge, this study explores a relatively underinvestigated topic as it uses investor protection indicators to jointly evaluate both direct and indirect effects on forced changes of CEO through cross-national research.

Analysis of the Effect of CEO Change and Financial Distress on Earnings Management in Insurance Companies Listed on the IDX for the 2013-2022 Period

Analysis of the Effect of CEO Change and Financial Distress on Earnings Management in Insurance Companies Listed on the IDX for the 2013-2022 Period

FANOVA taikymas kompanijų su dažnu ir retu generalinio direktoriaus pasikeitimu palyginimui

The aim of this study was to analyze the data from the Nasdaq Baltic listed companies’ financial statements and to estimate if the CEO changes have a significant influence on the financial performance: profitability, indebtedness and stock price. Data was collected and financial ratios were computed for 34 companies during 2006 to 2021 (2008 to 2022 for stock prices). The companies were divided into 3 groups: ones that had no CEO changes over the period; those that had 1 or 2 and those with 3 or more. Point-wise ANOVA, fANOVA and fMANOVA were conducted. Both point-wise and functional ANOVA indicated that there is a significant difference of at least one group from the others in terms of ROA and EBITDA margin. After conducting two-sample tests, the group with 3 or more CEO changes was identified as having a significantly higher EBITDA margin than the others. Furthermore, a significant positive relationship between the stock price and the CEO turnover was uncovered in the function-on-scalar regression results.

Mandatory CSR disclosure and CEO pay performance sensitivity in China: evidence from a quasi-natural experiment

PurposeThis paper aims to empirically examine the impact of mandatory CSR disclosure on the CEO pay performance sensitivity.Design/methodology/approachUsing the mandatory requirement of CSR disclosure as an exogenous shock, the authors compare the changes in CEO pay performance sensitivity for treatment firms with control firms through a difference-in-difference (DiD) approach.FindingsThe authors find that mandatory CSR disclosure enhances CEO pay performance sensitivity. The results also show that monitoring CEO power is a conduit through which mandatory CSR disclosure affects CEO pay performance sensitivity. The positive impact is more profound in firms with a powerful CEO, i.e. one who is politically well-connected, holds dual roles as both CEO and Chairman, and/or has had a long tenure. Furthermore, the increased CEO pay performance sensitivity after the mandate is prominent among state-owned enterprises (SOEs) only.Practical implicationsThe findings of this paper have implications for other economies with similar institutional backgrounds as China. Although the mandatory CSR disclosure does not require firms to spend on CSR investment, the mandatory CSR disclosure alters firm behaviour, and mitigates agency problems.Originality/valueThis paper contributes to the studies on the impact of CSR disclosure on firms' behaviour. To the authors' knowledge, this is the first study to examine the effects of mandatory CSR disclosure on CEO pay performance sensitivity using the quasi-natural experiment settings.

R&D expenditures and CEO compensation policy: The effect of corporate control and market competition on managerial opportunism

AbstractChina and Taiwan (so‐called Greater China) are representative of two of the fastest‐growing economies in the Pacific Rim region. This study uses Taiwanese high‐tech firms as sample and explores whether boards of directors attempt to avoid opportunistic reductions in research and development (R&D) investments by CEOs. This study considers a scenario in which high‐tech firms face a small earnings decline or a small loss but their CEOs could opportunistically cut R&D investments to improve financial results. The focus of this study is to examine how corporate control (whether or not a firm is controlled by a family) and market competition affect the relationship between R&D investments and CEO compensation schemes. Overall, we find that the stock‐based incentive compensation is more effective than the cash compensation in deterring managerial opportunism. In non‐family firms, we find there exists a positive significant relationship between changes in R&D expenditures and changes in CEO stock‐based compensation when a firm is faced with a small earnings decline or a small loss. Specifically, compared to family firms, the boards of directors of non‐family firms face more severe agency problems (as a result of the separation of ownership and control) and therefore tend to significantly adjust the incentive components in CEO compensation schemes to deter managerial opportunism. Regarding the effect of market competition, we find that incentives to adjust compensation plan to remove CEOs from opportunistically reducing discretionary R&D investments are greater in firms facing more intense market competition.

The Relationship between Changes in Corporate Governance Characteristics and Intellectual Capital

The primary goal of this study was to investigate the effects of changes in corporate governance elements on a company’s valuable resources (such as intellectual capital and its components). Previous studies have examined the impacts of some corporate governance characteristics on intellectual capital performance as a whole and they have produced inconclusive and different results. This paper examines the effects of some corporate governance characteristics (i.e., the change in CEO, the evolution of auditor, the change in board independence, and the change in institutional ownership) on intellectual capital and its components (i.e., capital employed, human capital, and structural capital). This research is based on a quantitative study and the selected sample contains 1170 observations from 220 companies listed on the Middle East Stock Exchange from 2011 to 2018. The research findings show a positive and significant relationship between an increase in institutional ownership and intellectual capital and its two components (human capital and structural capital). The results support the relationship between a change in auditor and intellectual capital and human capital efficiency. Further, a positive and significant association was found between an increase in board independence and human capital. However, no relationship was found between a change of CEO and intellectual capital or any of its components. This study extends the research field of corporate governance by studying the effects of changes in corporate governance characteristics on intellectual capital for the first time. Given the significant role of intellectual capital in the performance of firms, this study provides essential information to organisations’ decision makers.

Cross-border M&As: The impact of cultural friction and CEO change on the performance of acquired companies

This study analyzes the impact of cross-border mergers and acquisitions (M&As) on the performance of target firms. Based on institutional theory, we hypothesize that performance deteriorates because of a lack of legitimacy, particularly when there is friction between the two national cultures and a higher risk of clashes between organizational cultures. We test our assumptions using an original dataset to compare the performance of Italian firms involved in inward cross-border M&As with that of continuing local firms that have a similar ex-ante likelihood of being merged or acquired. We apply coarsened exact matching (CEM) to establish the control group and a difference-in-differences (DID) approach to account for the possibility that target companies produce superior results simply because foreign investors “cherry-pick” the best-performing firms. Contrary to predictions, we find that foreign ownership does not deteriorate growth but enhances the profitability of target firms compared to purely domestic companies. In addition, we illustrate that the latter result remains applicable when cultural frictions between national cultures are high and when the CEO of the target company is replaced or joined by a new CEO after the deal.

Bank CEO careers after bailouts: The effects of management turnover on bank risk

We study whether bank bailouts affect CEO turnover and its subsequent impact on bank risk. Exploiting the Troubled Asset Relief Program (TARP) of 2008, we find that TARP funds temporarily decreased the likelihood of bank CEO turnover during the crisis (2008–2010) but significantly increased CEO changes afterwards. Our results show that replacing TARP CEOs reduced individual bank's risk as well as the bank's contributions to the systemic risk. Finally, we find that TARP CEO turnover was mainly driven by a decrease in the bank's political capital. Overall we provide evidence that bank bailouts have important implications for banks’ risk-taking and systemic risk, insofar as bailouts affect bank CEO turnover.

Does writing down goodwill imperil a CEO’s job?

We find that accounting charges for goodwill impairment, which imply a deterioration in the capabilities of acquired assets to generate expected cash flows, provide useful indicators of CEO underperformance. The results show that the size and presence of a goodwill impairment charge are positively associated with forced, but not voluntary, CEO turnovers. This implies that goodwill impairment provides information before CEO changes occur. We also find that goodwill impairment has incremental power to predict forced turnover when it is unexpected based on book value relative to market value of equity and when it runs counter to overall firm performance. The association between goodwill impairment and forced CEO turnover varies with audit quality, consistent with the importance of the perceived reliability of accounting information for its effect on CEO retention decisions. Given that the FASB recently considered eliminating annual goodwill impairment testing (FASB, 2022) whereas the IASB not only prefers impairment testing but is considering requiring additional related disclosures (IASB, 2020), our evidence on the informativeness of goodwill impairment charges is timely.

Corporate culture: The interview evidence

Corporate culture: The interview evidence

The effect of CEO change on audit hours: Focusing on the Big4 auditor and partner audit hours

경영자 교체가 감사인의 총 감사시간과 파트너 감사시간에 영향을 미치는지와 이러한 결과가 Big4 여부에 따라 차별적으로 나타나는지 살펴보았다. 경영자 교체는 이익조정과 관련되어 있어 감사인은 감사시간을 증가시킬 것으로 예상된다. 한편 감사실패에 따른 명성하락이나 경제적 손실의 영향이 상대적으로 큰 Big4의 경우 이러한 경향이 더욱 클 것으로 예상된다. 또한 파트너는 기업수준에서 감사위험을 판단하기 때문에 파트너의 감사시간이 주로 증가할 것으로 예상된다. 2014년부터 2017년까지 KISVALUE 및 TS2000 데이터베이스에서 피감사회사 및 감사인의 특성에 대한 수집이 가능한 상장기업 3,448 기업-연도를 대상으로 분석을 수행하였다. 실증분석 결과는 다음과 같다. Big4 표본에서 경영자 교체는 감사인의 총 감사시간과 파트너 감사시간을 증가시키는 것으로 나타났다. 기타 분석에서는 Big4 표본에서 기타 전문가 직급의 감사시간만 유의한 양(+)의 값이 나타났다. 본 연구의 결과는 경영자 교체가 감사시간과 관련이 있다는 선행연구를 확장하여 Big4 여부와 감사인의 직급에 따라 그 효과가 차별적으로 나타난다는 점을 살펴보았다는데 그 의의가 있다. 또한 경영자 교체가 회계감사 실무에서 감사계획에 포함되는 것이 적절한가에 대한 실증적 근거를 제시했다는 점에서 시사점이 있다.

What's my style? Supply‐side determinants of debt covenant inclusion

AbstractWe examine the supply‐side determinants of debt covenants included in loan agreements. Controlling for borrower characteristics, we find evidence that the covenants that lead arranger banks include in new contracts persist into future contracts for at least 3 years. We document that this covenant style effect is smaller when borrowers have recently violated a debt covenant or when the loan issue amount is large, and it is larger when the costs of contracting are highest and when a borrower provides collateral. We also find that the covenant style effect decreases following changes in a bank's CEO or CFO. Overall, our evidence is consistent with lenders’ covenant preferences arising from strategic cost‐benefit analysis informed from prior lending experiences and being related to lender expertise in negotiating, monitoring and enforcing covenants.

INVESTIGATING RELATIONSHIP BETWEEN CHANGES IN CORPORATE GOVERNANCE CHARACTERISTICS AND PROFIT QUALITY

The main purpose of this study is to investigate the relationship between changes in corporate governance characteristics of profit quality in companies listed on the Tehran Stock Exchange. In this study, changes in the characteristics of corporate governance include changes in the independence of the board of directors, CEO, auditor and concentration of ownership, and the Kothari (2005) model has been used to measure the quality of profits. The statistical population of the study includes 161 companies listed on the Tehran Stock Exchange and the period is from 2010 until 2015. The tests were performed at the general level of companies, small companies and large companies. The research findings indicate that in general, there is a negative and significant relationship between changes in corporate governance characteristics, i.e. changes in CEO, auditor and ownership concentration with profit quality at the general level of companies. But in large corporations, no relationship was found between changes in board independence and ownership concentration with profit quality. Also, there is a negative and significant relationship between the changes of the CEO and the auditor with the quality of profits at the level of large companies. In addition, no significant relationship was found between changes in corporate governance and profit quality at the level of small companies

The Effect of Fraud Pentagon on Fraudulent Financial Statement of Banking in Indonesia

This study aims to determine the effect of financial targets, financial stability, external pressure, effective monitoring, nature of industry, change in auditors, rationalization, change of company directors, CEO’s Picture on fraudulent banking financial statements in Indonesia for 2014-2019. This study uses the dependent variable, namely fraudulent financial reporting, while the independent variables are financial targets, financial stability, external pressure, effective monitoring, nature of industry, change in auditors, rationalization, competence and arrogance. The show that the variable financial targets, change in auditors, change of directors and CEO’s picture have no effect on the detection of fraudulent financial statements. Meanwhile, financial stability, external pressure, ineffective monitoring, nature of industry, and rationalization have an effect on the detection of fraud in financial reports for 2014-2019. The results of this study provide an understanding for the public and the general public that the government’s efforts so far have always played a major role in maintaining the condition of the Indonesian economy in order to avoid attempts to cheat financial statements.

To be or not to be all-equity for firms that eliminate long-term debt

Despite the advantages of debt, a significant number of firms that have an established leverage policy deliberately become all-equity. These firms eliminate a substantial amount of long-term debt as the average firm’s leverage ratio is approximately 30 percent at the year-end prior to debt elimination. Firm-level “shocks” such as CEO turnover and changes in credit ratings cannot explain the dramatic recapitalization decision. Consistent with the tradeoff theory, firms that eliminate debt have lower benefits (less tax shield benefits, agency costs) and higher costs (probability of financial distress, access to capital markets, etc.) of leverage in the three prior years compared to a matched sample. We also find that the factors influencing the decision to eliminate all debt is different from those to significantly reduce leverage or to have very low debt levels. Firms primarily finance the approximately $70 million of average long-term debt eliminated using proceeds from sales of relatively unproductive assets and from equity issues. Interestingly, over half of these firms issue significant amount of new debt within three years of becoming all-equity. Firms with lower liquidity and non-debt tax shields, higher potential overinvestment agency costs, and those that issue equity at the debt elimination year are more likely to relever quickly.

CEO turnover in public and private organizations: analysis of the relevance of different performance horizons

PurposeThis paper investigates how past performance changes, prior CEO replacements and changes in the chairperson impact CEO turnover in public and large private businesses.Design/methodology/approachWe analyze 1,679 CEO replacements documented in a sample of 1,493 Spanish public and private firms during 1998–2004 by computing dynamic binary choice models that control for endogeneity in CEO turnovers.FindingsThe results reveal that different performance horizons (short- and long-term) explain the dissimilar rate of CEO turnover between public and private firms. Private firms exercise monitoring patience and path dependency characterizes the evaluation of CEOs, while public companies' short-termism leads to higher CEO turnover rates as a reaction to poor short-term economic results, and alternative controls—ownership and changes in the chairperson—improve the monitoring of management.Originality/valueOur results show the importance of controlling for path dependency to examine more accurately top executives' performance. The findings confirm that exposure to market controls affects the functioning of internal controls in evaluating CEOs and shows a short-term performance horizon that could be behind the recent moves of public firms going private or restraining shareholders' power.

Does frequent leadership changes influence firm performance? Insights from China

This letter is a first attempt to investigate the relationship between frequent leadership changes during the year and firm performance. We analyze how CEO frequency during one-year period impact performance indicators of Chinese listed firms. The results of panel fixed-effect regression reveal that CEO turnover leads to a decline in corporate performance measured by ROA and ROE. Moreover, with an increase in annual turnover frequency, the degree of performance decline gets more pronounced. These results remain robust after controlling for endogeneity using the alternate econometric specification of 2SLS. The study findings assert that frequent CEO changes are not conducive to firm performance. Hence, stability in the CEO tenure is essential to sustain and optimize financial performance of an enterprise.

Shrinking Horizons: The Cyclical Relationship between CEO Change and Corporate Restructuring

While there is much theory and empirical research to suggest that newly appointed CEOs will undertake bold restructuring activities, there is not as much research about restructuring’s consequences for CEOs and their careers. In this study, we demonstrate that there is a cyclical relationship between CEO change and restructuring, such that restructuring activities by newly appointed CEOs will undercut, instead of enhancing, their standing, resulting in their early departure. We test our argument with the case of asset divestiture and workforce downsizing. We present three related sets of findings using data on most listed U.S. companies between 2002 and 2018 as well as matched samples constructed using coarsened exact matching (CEM). First, firms are more likely to undertake both types of restructuring after CEO change. Second, firm performance declines in the subsequent years after both divestiture and downsizing. Lastly and as a result, restructuring activities increase the risk of CEO dismissal, especially when restructuring was initiated soon after CEO change. Taken together, our findings show how prompt response of new CEOs to market pressure can prompt their ouster, shortening their perceived time horizon within which they have to prove themselves and thereby making short-term oriented CEO behavior more likely.

New Insights on the Obstacles, Opportunities, and Outcomes on Women’s Path to Leadership

We adopt a multi-method approach to examine women’s path to leadership from before their careers have even begun, to their leadership at the CEO level. Across four talks employing field studies, lab experiments, and natural language processing, we study how a follow-your-passions ideology causes women to opt out of male-dominated careers, how women’s desires for power or status intersect to impact their likelihood of incurring backlash, how female managers prefer leading smaller teams due to fear of backlash when leading larger teams, and how hiring a female CEO changes firms’ official use of language around gender and agency such that the semantic meaning of the two concepts becomes more similar. The papers in this symposium broaden our understanding of how gender stereotypes present obstacles in women’s career paths, while also identifying potential solutions to backlash triggered as a means of enforcing traditional gender roles. Does the Follow-Your-Passions Ideology Cause Occupational Self-Segregation? Presenter: Sapna Cheryan; U. of Washington Escaping Backlash? The Mitigating Effect of Desiring Status on Backlash Against Ambitious Women Presenter: Sonya Mishra; UC Berkeley Gender & Group Size: Women Prefer Managing Smaller Teams Due to Impression Management Concerns Presenter: Nicole Abi-Esber; Stanford GSB Hiring women into leadership positions affects the gendering of language Presenter: Matthew Asher Lawson; Fuqua School of Business, Duke U.

Does early-life war exposure of a CEO enhance corporate information transparency?

This study investigates the relationship between a CEO’s war experience and corporate information transparency. Using the Korean War as an exogenous shock, we find that firms managed by war-exposed CEOs have greater information transparency than firms managed by CEOs who are not war-exposed. Specifically, war-exposed CEOs tend to mitigate information in an asymmetrical fashion as they are more concerned about the potential downside risks. This observation is more pronounced during the global financial crisis. Additionally, war-exposed CEOs who have lived close to the regions where large-scale massacres have occurred seek more information transparency than the CEOs who have lived at a distance from such inhumane experiences. Lastly, we employ regression discontinuity design, propensity score matching, CEO change analysis, and alternative sample regressions to show that the results are not driven by endogeneity concerns.