Turnover-performance Sensitivity Research Articles

CEO Noncompete Agreements, Job Risk, and Compensation

Abstract Using hand-collected data on CEO noncompete agreements (NCAs), we find that NCAs are less common when CEOs expect to incur greater personal costs from reduced job mobility and more common when firms expect to suffer greater economic harm if departing CEOs leave to work for a competitor. Additionally, turnover-performance sensitivity is stronger when CEOs have NCAs. Finally, total compensation and incentive pay are higher if CEOs have more enforceable NCAs. Our identification strategy exploits staggered state-level changes in NCA enforceability. Overall, our findings suggest that restrictions on job mobility have important implications for how CEOs are monitored and compensated.

Are Quad-Qualified Directors Effective Board Monitors? An Analysis of CEO Turnover

The extant board governance literature has generally examined the relationship between the characteristics of directors and their monitoring performance in isolation. To overcome the limitations of this approach, Hambrick, Misangyi and Park (2015, AMR) have proposed the board quad model, which combines the four individual directors’ attributes of independence, expertise, bandwidth and motivation. In this paper, we investigate the validity of model in the context of CEO turnover decisions. To define whether individual directors are quad-qualified, we create composite measures of each attribute based on director-level employment, stock ownership & social network data and then construct an encompassing quad-qualification score. Using logistic regression analysis, we find that a greater presence of quad-qualified directors leads to a greater CEO turnover sensitivity to stock performance. Furthermore, we show that the turnover-performance sensitivity increases in particular for boards with three or more quad-qualified members. Implications for practice and theory are discussed.

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.

CEO gender and managerial entrenchment

This paper investigates the effect of gender on managerial authority and control over firms. The study examines S&P 1500 firms for the period of 1999–2014. Our findings suggest that accounting performance, firm value, CEO age, firm age, and board size reduce the likelihood of appointing female managers. On the other hand, the appointment of female CEOs is directly associated with the percentage of female directors, board independence, and beta. The study confirms the notion that female CEO appointments are generally associated with firms facing adverse conditions, and shows that female CEOs are more entrenched as compared to male CEOs. We find that the presence of female CEO decreases the turnover-performance sensitivity, increases the E-index, and inflates CEO compensation. Our research suggests that the level of female CEOs’ entrenchment provides them with greater job security, higher level of control, and inflated pay that compensate the risk of accepting the appointment in a high risk and poor performing firm.

Female representation on boards and CEO performance‐induced turnover: Evidence from Russia

AbstractResearch Question/IssueThis study examines the influence of female board representation on CEO turnover and firm value. We focus on Russia, a patriarchal country with vast gender differences, where empathy, patience, and supportiveness are considered fundamental qualities of females.Research Findings/InsightsUsing a sample of public firms listed on the Moscow Exchange from 2006 to 2015, we find that female representation on boards is associated with lower CEO turnover–performance sensitivity. Further, female boards appear to add firm value, as we find that CEO retention decisions are associated with improved future firm value when the decision is made by a female board. Furthermore, we identify that female representation on boards is associated with greater diligence (i.e., hold more board meetings) after retaining their underperforming CEOs.Theoretical/Academic ImplicationsOur findings suggest that female boards tend to develop a long‐term view of CEO performance and that such boards exercise greater diligence and supportiveness, thereby adding shareholder value. Our results also indicate that patience and collaboration of corporate boards afford opportunities to develop strategic thinking, which is particularly valuable for a firm in times of crisis. Our study contributes to the research on what qualities of a board affect its decision making and effectiveness. Our research also adds to the literature on female board representation. We study Russia, where gender differences are prominent, and female representation occurs by happenstance rather than regulatorily / intentionally. Overall, we are able to attribute our findings to female representation on boards.Practitioner/Policy ImplicationsOur study contributes to the burgeoning research on corporate governance in Russia. Although the Russian economy has demonstrated unprecedented growth among emerging markets, research on corporate governance in Russia remains scarce. Our study is among the first efforts to understand how female boards perform in a patriarchal country. Our investigation, therefore, offers important insights for policymakers and practitioners.

Does Board Patience Pay Off?

This study examines the influence of female board representation on CEO turnover and firm value. We focus on Russia, a patriarchal country with vast gender differences, where empathy, patience, and supportiveness are considered fundamental qualities of females. Using a sample of public firms listed on the Moscow Exchange from 2006 to 2015, we find that female representation on boards is associated with lower CEO turnover–performance sensitivity. Further, female boards appear to add firm value, as we find that CEO retention decisions are associated with improved future firm value when the decision is made by a female board. Furthermore, we identify that female representation on boards is associated with greater diligence (i.e., hold more board meetings) after retaining their underperforming CEOs. Our findings suggest that female boards tend to develop a long‐term view of CEO performance, and that such boards exercise greater diligence and supportiveness, thereby adding shareholder value. Our study contributes to the research on what qualities of a board affect its decision making and effectiveness. We study Russia, where gender differences are prominent, and female representation occurs by happenstance rather than regulatorily intentionally. Our study contributes to the burgeoning research on corporate governance in Russia. Although the Russian economy has demonstrated unprecedented growth among emerging markets, research on corporate governance in Russia remains scarce. Our study is among the first efforts to understand how female boards perform in a patriarchal country. Our investigation, therefore, offers important insights for policymakers and practitioners.

Polarized Corporate Boards

We show that political polarization between directors and a CEO negatively impacts the effectiveness of corporate boards. At the director level, polarization increases directors’ incentive to monitor the CEO but creates a hostile board environment and discourages moderate directors’ board meeting attendance. This leads to compromised board capacity at the firm level and significantly reduces forced turnover-performance sensitivity. Our results are more pronounced in presidential election years and for firms with more monitoring and advising needs. Finally, we show that polarization in the boardroom lowers investment-Q sensitivity. Our findings highlight the real economic cost of political polarization.

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.

Disagreement-induced CEO turnover

We propose and test a new explanation for forced CEO turnover, and examine its implications for the impact of firm performance on CEO turnover. Investors may disagree with management on optimal decisions due to heterogeneous prior beliefs. Theory suggests that such disagreement may be persistent and costly to firms; we document that this induces them to sometimes replace CEOs who investors disagree with, controlling for firm performance. A lower level of CEO-investor disagreement serves to partially “protect” CEOs from being fired, thus reducing turnover-performance sensitivity, which we also document. We also show that firms are more likely to hire an external CEO as a successor if disagreement with the departing CEO is higher. Disagreement declines following forced CEO turnover. Using various empirical strategies, we rule out other confounding interpretations of our findings. We conclude that disagreement, independently of firm performance, affects forced CEO turnover.

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.

Deregulation and Board Policies: Evidence from Performance Measures Used in Bank CEO Turnover Decisions

The financial crisis has led to renewed interest in the effects of deregulation on bank governance and incentives provided to bank CEOs. We examine the relation between bank CEO turnover and performance, and whether this relation has been affected by banking deregulation. We find that bank CEO turnover is more (less) sensitive to stock (accounting) performance in the post-deregulation period. We also find that such changes in turnover-performance sensitivity primarily exist in large banks, which are best positioned to exploit growth opportunities, and in banks that expand geographically after deregulation. Our results indicate an increased (decreased) emphasis on stock (accounting) performance in turnover decisions when competition and growth opportunities are greater in the deregulated environment. The findings provide evidence that the information used in board decisions varies with features of the competitive environment.

Is board turnover driven by performance in family firms?

We study director turnover as a corporate governance mechanism in family firms; specifically, the effect that family involvement in management, ownership, and control has on director turnover (direct effect) and on director turnover-performance sensitivity (moderating effect). Using a sample of Colombian companies, we find a negative relationship between turnover and firm performance. Additionally, we find that family involvement in management, ownership, and on boards leads to (1) more stable directorships and reduced director turnover and (2) cancellation of the expected director turnover-performance sensitivity. This last result implies that director turnover in firms with family influence is not driven by financial results, which suggests greater (more severe) agency conflicts between controlling families and minority shareholders. Finally, we find that family involvement as indirect ownership through pyramidal control increases director turnover, which suggests the existence of internal markets for directors within business groups.

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.

Restrictions on CEO Mobility, Performance-Turnover Sensitivity, and Compensation: Evidence from Non-compete Agreements

Using hand-collected data on chief executive officer (CEO) non-compete agreements (NCAs), we find that NCAs are less likely when CEOs expect to incur greater personal costs from reduced job mobility and more likely when firms expect to suffer greater economic harm if departing CEOs work for competitors. Additionally, turnover–performance sensitivity is stronger when CEOs have NCAs. Finally, total compensation and incentive pay are higher if CEOs have more enforceable NCAs. Our identification strategy exploits staggered state-level changes in NCA enforceability. Overall, our findings suggest that restrictions on job mobility have important implications for how CEOs are monitored and compensated.

Are institutional investors with multiple blockholdings effective monitors?

We examine whether institutions’ monitoring effectiveness is related to the number of their blockholdings. We find that the number of blocks that a firm's large institutions hold is positively associated with forced chief executive officer (CEO) turnover-performance sensitivity, abnormal returns around forced CEO turnover announcements and 13D filings, and changes in firm value. These results are particularly evident when institutions have multiple blockholdings in the same industry, when they have activism experience, or when they have long-term blockholdings in their portfolio firms. Our results suggest that information advantages and governance experience obtained from multiple blockholdings are important channels through which institutions perform effective monitoring.

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.