CEO Turnover-performance Sensitivity Research Articles

CEO compensation complexity: Optimal contracts or agency problems?

AbstractI construct a CEO pay complexity index based on grant‐level compensation data to test whether compensation complexity is consistent with optimal contracts or agency problems. Complexity may represent board efforts to contract optimally or a means by which the CEO camouflages agency issues and rent extraction. I find evidence supporting the agency view by showing how complexity is negatively related to firm value, profitability, and CEO turnover–performance sensitivity. I also examine the relation between complexity and CEO investment behavior and find mixed results. Overall, the findings relate to shareholders' dissatisfaction with the increased complexity of CEO compensation.

Small but salient: Minority shareholders’ innovation attention in interactive online platforms and corporate innovation

We examine the impact of minority shareholders’ innovation attention on corporate innovation. The catering hypothesis suggests that firms cater to minority shareholders by increasing only innovation quantity. The monitoring hypothesis argues that innovation attention has monitoring effect and thus motivates managers to pursue both innovation quantity and quality. Using a large sample of Chinese firms and minority shareholder postings on two official interactive online platforms, we document that innovation attention positively impacts innovation quantity and quality. The findings support the monitoring hypothesis. Our findings are robust to alternative innovation metrics and innovation attention, and after accounting for endogeneity. Additional analyses suggest that: (1) the effect is more salient for firms with more dispersed ownership concentration, higher innovation pressure, and greater degree of information asymmetry, (2) lowered agency cost due to minority shareholder attention is the transmission channel for the results, and (3) conditional on a firm’s performance, a high innovation attention from minority shareholders reduces the CEO turnover-performance sensitivity and stock turnover, which is consistent with the notion that minority shareholders’ innovation questions help raise the innovation failure tolerance to drive more innovation quantity and quality.

Remote Board Meetings and Board Monitoring Effectiveness: Evidence from China

Abstract Using Chinese data, we examine whether synchronous remote board meetings, which facilitate status equalization among directors and alleviate their pressure for conformity, affect board monitoring effectiveness. We find that compared to face-to-face meetings, synchronous remote meetings are associated with directors’ better meeting attendance behavior, a higher likelihood of director dissent on monitoring-related proposals, higher forced CEO turnover-performance sensitivity, and more effective investments. These results hold when we use remote meetings that include both synchronous and asynchronous remote meetings. Proposal-director level analysis further shows that remote meetings reduce the pressure to conform faced by young first-term directors and socially connected directors. Authors have furnished an Internet Appendix, which is available on the Oxford University Press Web site next to the link to the final published paper online.

Gendered performance evaluation in CEO turnover

I examine gender differences in CEO turnover-performance sensitivity to provide evidence for gendered performance evaluation in leadership positions from a new perspective. Using a large sample of Chinese listed companies from 2010 to 2019, I find that on average the turnover-performance sensitivity of female CEOs is significantly higher than that of their male counterparts, indicating that female CEOs are evaluated more unfavorably when performance declines. By exploring possible moderators of the gendered turnover-performance sensitivity, I observe that gender differences in CEO turnover-performance sensitivity are moderated by gender diversity in upper echelons, female CEOs' informal relationship with board members, CEO tenure, investor attention, and characteristics of controlling shareholders. In addition, below the performance threshold for CEO turnover risk, I document a performance threshold for gender differences in CEO turnover-performance sensitivity, suggesting that the unfavorable performance evaluation of female CEOs is triggered by extreme underperformance. I also find that past performance declines significantly worsen the evaluation of female CEOs' current performance but are immaterial to that of male CEOs. Finally, there are no significant gender differences in the performance threshold for CEO turnover risk, in the direct effect of past performance on the likelihood of current CEO turnover, and in the effect of industry performance on CEO turnover. This study particularly contributes to unraveling the boundary conditions of gender differences in CEO turnover-performance sensitivity and to opening the black box of CEO evaluation process from a gender perspective.

When are busy boards beneficial?

Whether busy boards contribute positively to firm value is inconclusive. I examine whether the effectiveness of busy boards varies with firms’ demands for specific board functions: advising and monitoring. I find that the positive effects of busy boards on advising quality, including corporate innovation and acquisition returns, are enhanced when firms have higher advising needs. I also show that the negative effects of busy boards on monitoring quality, including forced CEO turnover-performance sensitivity and income-increasing earnings management, are mitigated when firms have lower monitoring needs. Taken together, firm value results suggest that the positive effect through improved advising is more likely to outweigh the mitigated negative effect through monitoring when firms have higher advising needs but lower monitoring needs.

CEO Pay Gaps and Bank Risk-Taking

Bank executives’ substantial compensation is seen as one of the factors that contributed to the risk-taking that led to the 2008–2009 financial crisis. We test whether and how pay disparities between CEO and non-CEO executives—the so-called CEO pay gap—influences risk-taking at publicly traded commercial banks in the U.S. We find strong evidence that larger CEO pay gaps are associated with lower risk levels, improved financial performance, and greater information transparency. Our findings are unique to banks and are consistent with the CEO power proposition. We corroborate this proposition by linking larger pay gaps to increased CEO power and low CEO turnover-performance sensitivity. Our results imply that placing absolute limits on bank CEO pay would likely result in increased bank risk-taking.

Directors’ Foreign Experience and Firm Innovation

ABSTRACT This paper investigates whether board directors with foreign experience promote firm innovation. The evidence suggests that firms with a larger proportion of directors with foreign experience on their board have better innovation outcomes, both quantity and quality. This finding remains for various robustness tests. We propose three potential underlying channels behind and verify them. The findings show that the positive effect of directors’ foreign experience on firm innovation is stronger for highly innovative industries and more pronounced when foreign experience is gained in highly innovative countries, supporting the advising channel. Besides, independent directors exert a greater effect on innovation than non-independent directors, supporting the monitoring channel. Furthermore, directors with foreign experience provide more failure-tolerant CEO incentives as they lower CEO turnover-performance sensitivity and CEO pay-for-performance sensitivity, supporting the insurance channel. Overall, our paper provides robust and comprehensive evidence for the impact of directors’ foreign experience on firm innovation.

Excessive managerial entrenchment, corporate governance, and firm performance

This paper investigates the differential impact of positive and negative excessive managerial entrenchment on the CEO turnover-performance sensitivity, CEO compensation, and firm performance. We measure the degree of managerial entrenchment using the E-index introduced by Bebchuk et al. (2009). Our findings suggest that an increase in excess CEO entrenchment reduces the likelihood of CEO turnover due to poor performance. We also show a positive association between excessive entrenchment and CEO compensation as managers gain more power and authority when they are entrenched. On the other hand, excess CEO entrenchment has an inverse correlation with firm performance and firm value. Overall, we propose that excessive managerial entrenchment has a converse impact on board monitoring and shareholders’ welfare.

Are Superstar Directors Effective in Corporate Governance?

In this paper, I hand-collected a sample of prestigious business award-winner directors based on the four types of awards discussed by Chen, Wu, and Zhivotova (2017) and use them to represent reputable board of directors. I examine how awardee directors would influence management monitoring effectiveness and corporate governance by testing with CEO compensation level, pay-performance sensitivity, risk-taking behavior, accounting conservatism, and turnover-performance sensitivity. The results show that with award-winner directors sitting in the boards, CEOs receive more incentive compensation, have higher risk-taking incentives, and the firm adopts higher level of accounting conservatism. The findings suggest that reputable directors are effective in performing monitoring and advising duties.

Identifying Ineffective Monitors from Securities Class Action Lawsuits

We identify “ineffective” institutional monitors based on the prevalence of occurrences of securities class-action lawsuits in the investors’ overall portfolio. We find that firms with a higher representation of such institutional investors among the firms’ large shareholders have a greater likelihood of future litigation. These firms consistently exhibit other unfavorable governance outcomes including poorer acquisition outcomes and lower CEO turnover-performance sensitivity. Moreover, firms owned by “ineffective” institutional investors experience higher short interest, suggesting that the market anticipates underlying managerial agency issues. Overall, our results suggest that class-action lawsuits provide an opportunity to uncover the monitoring effectiveness of large institutional shareholders.

Shareholder Lawsuits and CEO Turnover Decisions

We study the effect of shareholder litigation rights on CEO turnover policies using U.S. states’ staggered adoption of Universal Demand laws, which restrict shareholder lawsuits that allege a breach of fiduciary duty by directors or managers. We document that reduced shareholder litigation rights are associated with greater CEO turnover-performance sensitivity, and that this effect is more prominent in firms with existing blockholders and higher ex-ante litigation risk. The empirical evidence suggests a substitute relationship between active monitoring through CEO turnover policies and disciplinary shareholder litigation. Our study contributes to the debate on the role of shareholder litigation in corporate governance.

Remote Board Meetings and Board Monitoring Effectiveness: Evidence from China

Using unique data on board meeting types of Chinese firms, we examine the effect of remote board meetings on board monitoring effectiveness. We find that compared to face-to-face meetings, remote meetings are associated with better meeting attendance behavior of directors, higher likelihood of director dissent on monitoring-related proposals, higher forced CEO turnover-performance sensitivity, and more effective investments. Proposal-director-level analysis further shows that remote meetings increase (reduce) dissension incentives of busy and young directors (first-term and socially connected directors). The results suggest that remote meetings improve board monitoring effectiveness by facilitating status equalization among directors and alleviating their pressure for conformity.

Independent executive directors: How distraction affects their advisory and monitoring roles

Active corporate executives are a popular source of independent directors. Although their knowledge, expertise, and network can bring value to firms on whose boards they sit, independent executive directors may be more likely to be distracted than other directors due to their outside executive roles. Using newly constructed data linking independent directors to their employers, we identify periods when employers' poor performance may distract them from board service. We find that firms with distracted independent executive directors have lower performance and value, higher CEO compensation, reduced CEO turnover-performance sensitivity, lower earnings quality, and lower M&A performance. These adverse effects are mainly driven by distracted directors who sit on relevant committees, and are stronger for small boards.

The Value of CEO Social Backgrounds for Chinese Listed Non-State-Owned Enterprises—An Evidence of CEO Turnover

We find that in Chinese listed non-state-owned enterprises (non-SOEs), if CEOs have political affiliations or family connections, their jobs are securer with poor firm performance and there is a synergistic effect of the two social backgrounds on CEO turnover-performance sensitivity (TPS). Politically affiliated CEOs’ face lower TPS if they are in superior performed non-SOEs, economic downturns, or non-SOEs with politically affiliated other managers. However, no such effects are found in listed SOEs.

Does Board Ethnic Diversity Impact Board Monitoring Outcomes?

AbstractThis study investigates whether board ethnic diversity is associated with stronger board monitoring outcomes. We explore a range of outcomes – CEO compensation, accounting misstatements, CEO turnover–performance sensitivity and acquisition performance – but find no evidence to support this. We also find no evidence that board ethnic diversity improves overall firm performance, even for those firms with higher agency problems. Our results are robust across different methodologies and have important practical implications, by informing the current public policy debate on board ethnic diversity.

Multiple Large Shareholders and Monitoring Effectiveness

We advance corporate governance research by examining the role of a firm’s multiple large shareholders on its monitoring effectiveness. We focus on the potential free-riding problem among the large shareholders and argue that free-riding reduces monitoring effectiveness, as reflected in the weakened CEO turnover-performance sensitivity. Longitudinal analyses based on 705 non-financial firms in Taiwan from 1997 to 2011 show that CEO turnover is negatively associated with firm financial performance. However, the negative relationship becomes weaker when large shareholders are more likely to free-ride on each other, such as when large shareholders are more numerous, more contestable, and share greater heterogeneity. The findings provide conceptual and practical implications for corporate governance research and practice.

Board structure and role of outside directors in private firms

AbstractWe examine the board composition and the role of outside directors in US private firms. We find that compared with public firms, private firms have a higher proportion of outside directors on the boards and select their outside directors in a more responsive way to their advisory and monitoring needs. We also find that private firms’ CEO turnover–performance sensitivity, earnings quality, going‐public likelihood, and IPO value increase with the proportion of outside directors. These results are consistent with the view that lack of external governance in private firms leads to a greater demand for board monitoring for private firms.

Powerful Blockholders and CEO Turnover

We identify the power of institutional blockholders to influence management using previous occurrences of forced CEO turnover at other firms in the blockholders’ overall portfolio. We create a “powerful blockholder linkage” measure that strongly predicts future forced CEO turnover. These effects are larger when “powerful” blockholders are more motivated to monitor and when they have had valuable monitoring experience. Moreover, firms with powerful blockholders display higher CEO turnover-performance sensitivity, pursue more value-increasing mergers, and have higher firm value. Overall, our results suggest that an identifiable group of powerful blockholders play an important role in corporate governance.

Geographic concentration of institutions, corporate governance, and firm value

We examine the impact of geographic concentration of institutional investors on corporate governance and firm value. We find that firms whose large institutions are closely located to each other experience more shareholder-coordinated activities before Schedule 13D filings, more concerted proxy votes against management proposals, higher forced CEO turnover-performance sensitivity, higher returns around CEO turnover announcements and Schedule 13D filings, and larger increases in Tobin's q. These results are robust to using the introduction of new direct airline routes as an exogenous source of variation in proximity. Our results suggest that geographic concentration of investors increases monitoring effectiveness.

High CEO Pay Ratios: Governance Failure or Superior Performance?

The ratio of CEO to average worker compensation (CEO pay ratio) in the U.S. has risen rapidly in recent years. There is an intense debate over whether high CEO pay ratios reflect managerial rent extraction and corporate governance failures, or firms’ ability to secure superior CEO talent, which is in short supply. To shed light on this debate, this study examines the relationship between CEO pay ratio and firm value/performance. We find that industry-adjusted CEO pay ratios are positively associated with both firm value and performance. In addition, firms with high CEO pay ratios are more likely to engage in value-enhancing acquisitions and exhibit stronger CEO turnover-performance sensitivity. Together, our results suggest that on average, high CEO pay ratios indicate firms’ success in securing scarce CEO talent, not a failure in corporate governance.