Monitoring Managers: Does it Matter?
01.03.2010
Francesca Cornelli, Zbigniew Kominek, Alexander Ljungqvist
G34, G24, G32, K22, O16, P21
Corporate Governance, Large Shareholders, Boards of Directors, CEO Turnover, Legal Reforms, Transition Economies, Private Equity
Economy and Society
Fausto Panunzi
We test under what circumstances boards discipline managers and whether such interventions improve performance. We exploit exogenous variation due to the staggered adoption of corporate governance laws in formerly Communist countries coupled with detailed โhardโ information about the boardโs performance expectations and โsoftโ information about board and CEO actions and the boardโs beliefs about CEO competence in 473 mostly private-sector companies backed by private equity funds between 1993 and 2008. We find that CEOs are fired when the company underperforms relative to the boardโs expectations, suggesting that boards use performance to update their beliefs. CEOs are especially likely to be fired when evidence has mounted that they are incompetent and when board power has increased following corporate governance reforms. In contrast, CEOs are not fired when performance deteriorates due to factors deemed explicitly to be beyond their control, nor are they fired for making โhonest mistakes.โ Following forced CEO turnover, companies see performance improvements and their investors are considerably more likely to eventually sell them at a profit.