Poor Firm Performance Research Articles

CEO Overpayment and Dismissal: The Role of Attribution and Attention

AbstractManuscript TypeEmpiricalResearch Question/IssueThis study investigates the moderating role of CEO overpayment on the relationship between firm performance and CEO dismissal. We also examine how contextual factors, including compensation disclosure regulation, firm index status, and firm age, influence board attention and attribution, and consequently affect the sensitivity of CEO dismissal to firm performance.Research Findings/InsightsUsing a sample of Chinese listed firms between 2002 and 2011, we find that overpaid CEOs are associated with a larger likelihood of dismissal in case of poor firm performance compared to their underpaid counterparts. In addition, CEO overpayment has a larger influence on the turnover‐performance relationship when executive compensation disclosure is mandatory, when a firm is index‐included, or younger.Theoretical/Academic ImplicationsThis study provides empirical support for attribution theory and the attention‐based view. Built on the concept of bounded rationality, it demonstrates that board sense‐making and causal attributions affect the CEO dismissal decision. Our study also sheds light on the influence of situational cues on shaping board attention and subsequent corporate governance decisions.Practitioner/Policy ImplicationsThis study offers insights to policymakers interested in enhancing the design of corporate governance mechanisms by paying attention to cognitive processes in the boardroom.

Performance-Based Turnover on Corporate Boards

We examine the threat of turnover as an incentive to align the interests of corporate directors with shareholders. Our results suggest an economically significant relation between director turnover and past firm performance. This relation only manifests in idiosyncratic stock returns; consistent with the monitoring of actions attributable to corporate boards. The director turnover-performance sensitivity increases over time as well as post-SOX and contemporaneous listing standards. This sensitivity also varies with numerous governance characteristics, most notably with the presence of an active external blockholder. In sum, the threat of replacement in the context of poor firm performance represents an economically significant incentive for directors.

The Rising Son Under the Shadow of Company Communities: Do Japanese Family Firms Really Excel?

Japanese corporate governance has long attracted attention from scholars due to its stark differences from the Anglo-Saxon model. Indeed, scholars have pointed to the unique aspects of Japanese governance to explain Japan’s economic miracle, only to reverse their view, citing it as a major factor behind the lost decades of the ‘90s and ‘00s. A recent study by Mehrotra, Morck, Shim, and Wiwattanakantang (2013) brings Japanese economic governance back into the spotlight. In their analysis of family-run firms, the authors find that although inherited control is linked to poor firm performance in other developed economies, heir-run firms actually perform well in Japan. In search of a convincing explanation for this finding, we studied the same sample of firms over the same period and reached varying results. Our paper relies on the concept of a “company community” to explain why Japanese family firms appear to outperform non-family firms. The company community, consisting of management and shareholders, is the core of the Japanese non-family listed firm. Japanese family firms, on the other hand, modify the characteristics of the company community to avoid critical defects in monitoring, incentives, and external labor markets. Rather than concluding that Japanese family firms performed well, the more plausible explanation may be that Japanese listed firms on the whole performed badly.

Unpacking experience effects in developing novel products for new markets

A key process for exploration is to develop products in order to serve new markets. An implicit assumption in the organizational learning literature, not yet tested empirically, is that the increasing breadth of knowledge and experience firms gain by expanding into new product markets (i.e. exploration experience) may enhance their capacity to innovate in the future. We address how firms may find it more challenging to learn from their exploration experience when they develop new technology instead of employing their existing technology to create new products. In our theory and analyses, we address endogeneity by accounting for the behavioral learning process that leads managers to explore new markets following periods of poor firm performance. We test our model using fine-grained data on new product development projects initiated by 52 biopharmaceutical firms between 1979 and 2000 and find empirical support. Our study identifies a theoretical boundary condition on the relationship between exploration experience in new product markets and subsequent performance in developing novel products.

Impression management through minimal narrative disclosure in annual reports

The literature on the impression management of discretionary narrative disclosures has largely focused on selectivity in the presentation and content of information. We argue that selectivity involves ‘including’ or ‘omitting’ certain items of information – ‘concealment’ (Merkl-Davies & Brennan, 2007 Figure 1) – which can be achieved either by manipulating the presentation of narrative disclosures (selectivity in the presentation of information), or by omitting narrative disclosure (selectivity in the content of information). In this study, we examine the concealment behaviour of minimal narrative disclosure (MND) in annual reports within the context of impression management. Based on a sample of publicly listed firms in Hong Kong, we first compare narrative disclosure items between MND firms and other sample firms and find that MND is more prominent in the domains of operating review and company overview, objectives and strategies. After controlling for the costs associated with disclosure, demand for external financing, market competition and political cost, our multivariate regression analysis shows that firms with poor performance and a higher risk of financial distress are more likely to engage in MND behaviour. We also find that MND firms exhibit deteriorations in firm performance in the subsequent year. Our findings are consistent with MND in annual reports being a deliberate impression management strategy to conceal information and explanations about persistently poor firm performance and future prospects to distract investors' attention away from a firm's weakness or negative news.

Who Drives Corporate Restructuring? Co‐Existing Owners in French Firms

AbstractManuscript TypeEmpiricalResearch Question/IssueThis study aims to explain who drives corporate restructuring, after a period of important corporate governance changes in France, and where the respective role of Anglo‐American institutional investors and domestic family owners have been the object of debate.Research Findings/InsightsUsing extensive longitudinal data from French publicly‐listed firms during the 2000–2007 period, we find that domestic family ownership is positively related to restructuring. This effect is magnified under conditions of high Anglo‐American institutional investor ownership and poor firm performance. We also find that restructuring improves subsequent firm performance.Theoretical/Academic ImplicationsWe contribute to corporate governance research on family firms with a contingent framework about the relative influence of different types of owners with supposedly different value systems and preferences on restructuring. Domestic family owners, even from a country where shareholder value maximization is not historically preeminent, promote restructuring. In contrast, the influence of Anglo‐American institutional investors is indirect: the more they are present in the firm's capital, the more French family owners will further support restructuring, as a means to preserve their socio‐emotional wealth. Anglo‐American institutional investor influence on French family owners is further accentuated under conditions of poor firm performance.Practitioner/Policy ImplicationsPractitioners and, in particular, (potential and current) owners can use our findings to reflect on the implications for corporate decisions of the relative presence of different owners coming from different institutional environments and thus with potentially different objectives. Our results may also be informative to policy makers to further enhance effective regulation.

Non-CEO executive mobility: The impact of poor firm performance and TMT attention

We present a comprehensive and integrative study of non-CEO executive mobility, proposing two complementary approaches: (1) mobility as a reactive process, driven by poor organizational performance (the dominant approach in prior literature) and (2) mobility as a proactive process, reflecting incumbent TMTs' patterns of (exploratory and exploitative) attention. Using a sample of 1168 observations proceeding from 197 US organizations (2000–2011), we empirically validate that non-CEO executives' exit and inflow is driven by poor organizational performance, and that CEO replacement mediates this effect (i.e., the so-called ‘sweep-out effect’). Furthermore, the probability of non-CEO executive inflow is higher when the incumbent TMT has a high level of exploratory attention and lower when there is a high level of exploitative attention. These ‘proactive’ effects occur over and above the ‘reactive’ processes of poor organizational performance.

Why CEO's Resign: Poor Performance or Better Opportunities?

The article focuses on factors that affect CEOs resignation. The common view is that CEOs resign because shareholders and the board force them to leave due to lower-than-expected performance. The present study challenges this view by suggesting that in fact CEOs often leave because of better opportunities elsewhere. They can find such opportunities by means of their networks, or connectedness, because CEO positions are rarely advertised. Therefore, connectedness provides an advantage in terms of finding a better position. Using data from a large database that contained information from nearly 7,500 CEOs over a 20-year period provided support for this idea. Connectedness, especially for “young” (i.e., below 60 years of age) CEOs weighted more in their resignations than poor firm performance. Nevertheless, connectedness was related to CEOs departure under any firm performance condition, suggesting that CEOs do not always leave because they are forced to but often because they have found a better deal in another firm.

Jumping Off Before The Ship Sinks: Independent Director Departure In China's Listed Companies

Drawing upon the logic of stigmatization, previous studies have demonstrated that independent director departure is more likely to occur after a negative event such as poor firm performance, scandal, and accounting irregularity. In this study, we propose that equipped with (better) inside information, independent directors may foresee looming problems and leave the board before poor performance occurs so that they won’t be stigmatized by the firm’s poor performance. We test this idea by taking advantage of the unique regulation on China’s publicly-listed companies, where an independent director can serve on a firm’s board for a maximum of two terms, which has three years. With data on 6,765 firm-year observations of non-financial companies listed in China’s stock exchanges in 2005-2009, we find that non-mandatory independent director departure--i.e., resignation during a term, or departure upon the completion of the first term--is associated with subsequent performance decline; whereas mandatory independe...

Why Are Firms Sold? Evidence from Acquisitions of European Private Firms

We examine motives to sell private firms and provide insights into the sources of value creation from acquisitions of private targets. Using a novel dataset, we document that less profitable, highly leveraged private firms that tend to underinvest are likely to be sold. Further, these firms experience a high level of top management turnover around the period of the acquisitions and this turnover is sensitive to poor firm performance. Additionally, we find significant improvement in firm performance such as profitability and sales growth following the acquisitions. These firms also adjust their capital structure towards lower leverage. By and large, our results suggest that sales of private firms facilitate the transition of assets to a more efficient use.

Unpacking Experience Effects in Developing Innovative Products for New Markets

A key process for exploration is to develop products in order to serve new markets. An implicit assumption in the organizational learning literature, not yet tested empirically, is that the increasing breadth of knowledge and experience firms gain by expanding into new product markets (i.e. exploration experience) may enhance their capacity to innovate in the future. We address how firms’ ability to learn from their exploration experience may depend on choices to employ new versus existing technology to develop new products, thereby leading to divergent outcomes. In our theory and analyses, we address endogeneity by accounting for the behavioral learning process that leads managers to explore new markets following periods of poor firm performance. We test our model using fine-grained data on new product development projects initiated by 52 biopharmaceutical firms between 1979 and 2000 and find empirical support. Our study identifies a theoretical boundary condition on the relationship between exploration experience in new product markets and subsequent innovation.

Is There Performance-Based Turnover on Corporate Boards?

We examine the threat of turnover as an incentive to align the interests of corporate directors with shareholders. Our results suggest an economically significant relation between director turnover and past firm performance. This relation only manifests in idiosyncratic stock returns; consistent with the monitoring of actions attributable to corporate boards. The director turnover-performance sensitivity increases over time as well as post-SOX and contemporaneous listing standards. This sensitivity also varies with numerous governance characteristics, most notably with the presence of an active external blockholder. In sum, the threat of replacement in the context of poor firm performance represents an economically significant incentive for directors.

CEO-Chair Duality Split: An Alternative to Firing

An interesting puzzle in corporate finance is the weak sensitivity of disciplinary action against CEO to poor firm performance. I show that this weak relation is in part driven by an overlooked alternative to firing, which in practice takes the form of splitting the CEO-Chairman role or demoting the incumbent CEO to the executive Chairman position. I first document that such demotions are a frequently used alternative disciplinary mechanism, accounting for nearly 40% of all involuntary CEO transitions. I further show that the use of this mechanism is concentrated among firms in which the CEO is most entrenched or the cost of firing its CEO is high, i.e. CEOs with firm or industry-specific managerial skills and those with strong long-term performance and weak governance. Market reactions to CEO demotions are positive, on average. Finally, I show that classifying CEO demotions as an alternative form of involuntary turnover magnifies the sensitivity of involuntary turnover to firm performance and eliminates the relation between performance and voluntary turnover.

CFOs Gender and Real Earnings Management

Using accruals as a proxy for financial reporting quality, Peni and Vahamaa (2010) and Barua, Davidson, Rama, and Thiruvadi (2010) provide evidence that female Chief Financial Officers (CFOs) are more moral than male CFOs. Using 2,048 U.S. firm-year propensity score matching samples from 1997-2014, this stereotyped relationship is re-examined by empirically testing the likelihood of Real Earnings Management (REM) by female CFOs. Overall, the results show that female CFOs are, on average, 6% more likely to manipulate REM than male CFOs. One possible explanation for these results is that female CFOs face significant pressure (e.g., age, wage or diversity) and/or are motivated by earnings management incentives (e.g., avoiding reporting losses, meeting earnings benchmarks or beating analysts’ forecasts). The likelihood of REM by female CFOs is weakened after including pressure on female CFOs into the regression models. Surprisingly, the results suggest that female CFOs who beat analysts’ forecasts by more than one cent are less likely to manipulate REM. This latter result suggests that the documented association between female CFOs and REM might be triggered by poor firm performance. Further analysis suggests that while female CFOs are significantly associated with high firm performance, female CFOs who manipulate REM are significantly associated with low firm performance, especially cash flow from operations. This study contributes to prior literature on diversity, organizational behavior, and earnings management in several ways. It suggests that individual behaviors in organizations are more complex than they appear. Early childhood and heredity may not be valid structural determinants of organizational behavior.

Family firms, family generation and performance: evidence from an emerging economy

Purpose– The purpose of this paper is to examine the impact of family ownership on firm performance. In particular the authors investigate whether family firms outperform non-family firms and whether first generation family firms perform better than second generation family firms in an emerging economy using Bangladesh as a case.Design/methodology/approach– This study uses a data set of 141 listed Bangladeshi non-financial companies for the period 2005-2009. The methodology is based on multivariate regression analysis.Findings– The result shows that family firms perform better than their non-family counterparts. The authors also find that family ownership has a positive impact on firm performance. The analysis further reveals intergenerational differences where family firms and performance are associated positively only when founder members act as CEOs or chairmen. However, when descendents serve as CEOs or chairmen family firms are associated with poorer firm performance.Originality/value– The authors extend the findings of previous studies that investigate the family ownership and firm performance relationship in developed economy settings, but neglected emerging economies. The study also informs the literature about the intergenerational impact of family firms on performance in an emerging market.

Radical or Incremental Innovations

We study the impact retirement has on how CEOs spend R&D funds. Consistent with retiring CEOs’ short horizons and growing conservatism, we find evidence that CEOs tend to prefer incremental innovations as they approach retirement. Using patent data to measure firms’ innovation outputs, we find that firms receive fewer patent grants for applications filed toward the end of CEO tenures, and these patent grants receive fewer subsequent citations. Moreover, we find that large amounts of vested, in-the-money option holdings exacerbate retiring CEOs’ preference for incremental innovations, and founder CEOs pursue incremental innovations to a greater extent than non-founder CEOs close to retirement. However, a normal “relay process” of managerial succession and higher stock ownership by independent directors mitigate retiring CEOs’ preference for incremental innovations. We find no evidence that the documented incremental innovations before retirement are driven by either poor firm performance or a general shift from innovation to stability as CEO tenures increase or as CEOs age. Overall, the study identifies a new type of myopic behavior related to CEO retirement and highlights the importance of looking beyond R&D spending in future studies on the managerial investment myopia.

Enhancing staff motivation in “tough” periods: implications for business leaders

Purpose – The purpose of the paper is to present a viewpoint based on an empirical study conducted by the author, which explored the motivational techniques used by 30 chief executive officers in the context of an advancing economy like Greece that faces a severe financial crisis and evaluated the impact of such motivational tools on staff performance. Design/methodology/approach – The viewpoint is based on a quantitative survey of 30 Greek large organizations involving the leaders of the firms and 113 workers. In all, 143 responses were collected concerning the main motivational techniques used by the participant leaders and their impact on employee behavior. Findings – Overall, the findings showed that in the short-term, both motivational models (i.e. “inspirational” versus “fear”) may lead to effective organizational performance. However, the main difference appears to be related to the long-term impact of each model on firm performance. In particular, the findings indicated that “fear motivation” is more likely to lead to poor firm performance in the long-run compared to “inspirational motivation” due to increased staff absenteeism and turnover. Practical implications – The core implication of the study is that “fear motivation” should be reconsidered by business leaders, as the particular motivational approach adopted has been based on a limited understanding around its overall impact on employee performance. As the analysis revealed, a motivational model focused around empowerment, trust and individual development may lead to better organizational results. Originality/value – It informs the existing management literature about the impact of different motivational patterns on employee performance, where our knowledge is limited.

Whom to dismiss? CEO celebrity and management dismissal

Based on the power dynamics in strategic leadership ranks, this study examines whether chief executive officer (CEO) celebrity serves as a source of CEO power and empirically investigates its role in management dismissal. In the spirit of scapegoating theory, this study proposes that CEO celebrity weakens the likelihood of CEO dismissal but strengthens the likelihood of executive dismissal in the face of poor firm performance. This study goes further to explore the previously unexamined question of “whom to dismiss” and argues that less powerful non-board executives as opposed to board executives are more likely to be handy scapegoats of power dynamics. The data from Korean public firms in the aftermath of the Asian financial crisis largely support such a scapegoating hypothesis.

How Do Boards Know when to Fire the CEO — And Does It Pay?

For decades, boards of directors have received increased scrutiny from researchers and the media. Boards are elected by shareholders to hire top managers, incentivize them, monitor their decisions and actions, and, when necessary, replace them. Researchers have spent a lot of time and effort trying to understand the conditions that allow boards to best perform these duties. Research shows, for example, that boards generally do a poor job tying CEO pay to fi rm performance without the benefi t of a large shareholder to press the issue (Gomez-Mejia, Tosi, & Hinkin, 1987). Studies also show that boards fi re CEOs in response to poor fi rm performance, especially when the board is full of independent directors who are not beholden to management. But sometimes performance falls and the CEO stays, even when there is a large shareholder and an independent board. So it seems likely that board members look at more than the “hard” numbers to make decisions about CEOs. What that may be, however, remains a mystery because the information that boards use to judge CEOs is cloaked in secrecy and locked in a “black box” away from researchers. That is until recently when a group of researchers gained access to the “black box”—not to the live board deliberations, mind you, but to previously confi dential information. Like sleuths chasing clues, the research team of Francesca Cornelli (London Business School), Zbigniew Kominek (European Bank of Reconstruction and Development), and Alexander Ljungqvist (New York University) gained access to unique reports containing investors’ and board members’ thoughts about CEO intentions and competence. This gave the researchers access to rich “soft” information that could be compared to “hard” fi nancial numbers. Better yet, these reports were about fi rms from former communist countries during their transition to a more market-oriented economy, so the data stretch across a time when these governments were changing the rules that govern who can fi re a CEO. This allowed researchers to go beyond asking what kind of information board members use to fi re CEOs to include asking how governance reforms affect investors’ ability to act on different kinds of information. It also allowed them to ask and offer a more defi nitive answer as to whether or not it pays to replace the CEO.

CFO Dismissal: The Role of Macro vs. Micro-level Performance Measures and External Constituents

Recently, scholars and practitioners point at the increasing importance of the Chief Financial Officer (CFO). This study examines factors that lead to the dismissal of the CFO. We propose that CFOs will be monitored and disciplined based on a mix of macro and micro-level performance measures, as represented by firm performance, liquidity, and the interest cover ratio. Further, poorly performing CFOs are disciplined through the financial community. Specifically, the presence of institutional investors and a high number of security analysts covering the firm will lead to increased CFO dismissal under conditions of weak firm performance. Using a panel data set with stock listed German companies for the period 2007 – 2011, we found that CFO dismissal is preceded by low levels of liquidity and interest cover ratio. However, firm performance has no direct effect on CFO dismissals. Further, we found that the presence of institutional investors increases the likelihood of CFO dismissal under conditions of poor firm performance.