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The impact of changes in firm performance and risk on director turnover

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  • Sharad Asthana
  • Steven Balsam
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    Abstract

    Purpose – The purpose of this paper is to show that director turnover varies in predictable and intuitive ways with director incentives. Design/methodology/approach – The paper uses a sample of 51,388 observations pertaining to 13,084 directors who served 1,065 firms during the period 1997-2004. The data are obtained from RiskMetrics, Compustat, Execu-Comp, CRSP, IBES, and the Corporate Library databases. Portfolio analysis, logit, and GLIMMIX regression analysis are used for the tests. Findings – The paper provides evidence that directors are more likely to leave when firm performance deteriorates and the firm becomes riskier. While turnover increasing as firm performance deteriorates is consistent with involuntary turnover, directors are also more likely to leave in advance of deteriorating performance. The latter is consistent with directors having inside information and acting on that information to protect their wealth and reputation. When inside and outside director turnover is contrasted, the association between turnover and performance is stronger for inside directors. Research limitations – Since data are obtained from multiple databases, the sample may be biased in favor of larger firms. The results may, therefore, not be applicable to smaller firms. To the extent that the story is unable to differentiate between voluntary and involuntary director turnover, the results should be interpreted with caution. Originality/value – Even though extant research has looked extensively at the determinants of CEO turnover, little has been written on director turnover. Director turnover is an important topic to study, since directors, especially outside directors, possess a significant oversight role in the corporation.

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    Bibliographic Info

    Article provided by Emerald Group Publishing in its journal Review of Accounting and Finance.

    Volume (Year): 9 (2010)
    Issue (Month): 3 (August)
    Pages: 244-263

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    Handle: RePEc:eme:rafpps:v:9:y:2010:i:3:p:244-263

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    Web page: http://www.emeraldinsight.com

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    Postal: Emerald Group Publishing, Howard House, Wagon Lane, Bingley, BD16 1WA, UK
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    Web: http://www.emeraldinsight.com/raf.htm

    Related research

    Keywords: Company performance; Directors; Employee turnover; Risk analysis;

    References

    References listed on IDEAS
    Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
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    1. Benjamin E. Hermalin & Michael S. Weisbach, 1996. "Endogenously Chosen Boards of Directors and Their Monitoring of the CEO," Working Papers _004, University of California at Berkeley, Haas School of Business.
    2. Weisbach, Michael S., 1988. "Outside directors and CEO turnover," Journal of Financial Economics, Elsevier, vol. 20(1-2), pages 431-460, January.
    3. Anil Shivdasani & David Yermack, 1998. "CEO Involvement in the Selection of New Board Members: An Empirical Analysis," New York University, Leonard N. Stern School Finance Department Working Paper Seires 98-059, New York University, Leonard N. Stern School of Business-.
    4. Denis, David J. & Denis, Diane K. & Sarin, Atulya, 1997. "Ownership structure and top executive turnover," Journal of Financial Economics, Elsevier, vol. 45(2), pages 193-221, August.
    5. Ravina, Enrichetta & Sapienza, Paola, 2007. "What Do Independent Directors Know? Evidence from Their Trading," CEPR Discussion Papers 6046, C.E.P.R. Discussion Papers.
    6. Paul A. Gompers & Joy L. Ishii & Andrew Metrick, 2001. "Corporate Governance and Equity Prices," NBER Working Papers 8449, National Bureau of Economic Research, Inc.
    7. Daniel Bergstresser & Thomas Philippon, 2003. "CEO incentives and earnings management," Proceedings 862, Federal Reserve Bank of Chicago.
    8. Suraj Srinivasan, 2005. "Consequences of Financial Reporting Failure for Outside Directors: Evidence from Accounting Restatements and Audit Committee Members," Journal of Accounting Research, Wiley Blackwell, vol. 43(2), pages 291-334, 05.
    9. Bernard S. Black & Brian R. Cheffins & Michael Klausner, 2006. "Outside Director Liability: A Policy Analysis," Journal of Institutional and Theoretical Economics (JITE), Mohr Siebeck, Tübingen, vol. 162(1), pages 5-20, March.
    10. Warner, Jerold B. & Watts, Ross L. & Wruck, Karen H., 1988. "Stock prices and top management changes," Journal of Financial Economics, Elsevier, vol. 20(1-2), pages 461-492, January.
    11. Balsam, Steven & Miharjo, Setiyono, 2007. "The effect of equity compensation on voluntary executive turnover," Journal of Accounting and Economics, Elsevier, vol. 43(1), pages 95-119, March.
    12. Huson, Mark R. & Malatesta, Paul H. & Parrino, Robert, 2004. "Managerial succession and firm performance," Journal of Financial Economics, Elsevier, vol. 74(2), pages 237-275, November.
    13. Farrell, Kathleen A. & Hersch, Philip L., 2005. "Additions to corporate boards: the effect of gender," Journal of Corporate Finance, Elsevier, vol. 11(1-2), pages 85-106, March.
    14. Benston, George J., 1985. "The self-serving management hypothesis : Some evidence," Journal of Accounting and Economics, Elsevier, vol. 7(1-3), pages 67-84, April.
    15. Parrino, Robert, 1997. "CEO turnover and outside succession A cross-sectional analysis," Journal of Financial Economics, Elsevier, vol. 46(2), pages 165-197, November.
    16. Masako Darrough & Srinivasan Rangan, 2005. "Do Insiders Manipulate Earnings When They Sell Their Shares in an Initial Public Offering?," Journal of Accounting Research, Wiley Blackwell, vol. 43(1), pages 1-33, 03.
    17. DeFond, Mark L. & Jiambalvo, James, 1994. "Debt covenant violation and manipulation of accruals," Journal of Accounting and Economics, Elsevier, vol. 17(1-2), pages 145-176, January.
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