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Monitoring managers: does it matter?

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Author Info

  • Francesca Cornelli

    (London Business School and the Center for Economic Policy Research)

  • Zbigniew Kominek
  • Alexander Ljungqvist

    (New York University's Stern School of Business and CEPR)

Abstract

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 “hard” information about the board’s performance expectations and “soft” information about board and CEO actions and the board’s 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 board’s 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 “honest mistakes”. Following forced CEO turnover, companies see performance improvements and their investors are considerably more likely to eventually sell them at a profit.

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Bibliographic Info

Paper provided by European Bank for Reconstruction and Development, Office of the Chief Economist in its series Working Papers with number 110.

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Length: 42 pages
Date of creation: Jan 2010
Date of revision:
Handle: RePEc:ebd:wpaper:110

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Related research

Keywords: Corporate governance; large shareholders; boards of directors; CEO turnover; legal reforms; transition economies; private equity.;

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References

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Citations

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Cited by:
  1. Schwartz-Ziv, Miriam & Weisbach, Michael S., 2011. "What Do Boards Really Do? Evidence from Minutes of Board Meetings," Working Paper Series 2011-19, Ohio State University, Charles A. Dice Center for Research in Financial Economics.
  2. Mike Burkart & Konrad Raff, 2011. "Performance Pay, CEO Dismissal, and the Dual Role of Takeovers," FMG Discussion Papers dp694, Financial Markets Group.
  3. Pierre Chaigneau & Nicolas Sahuguet, 2013. "The effect of monitoring on CEO pay practices in a matching equilibrium," LSE Research Online Documents on Economics 55405, London School of Economics and Political Science, LSE Library.
  4. Sprenger, C., 2012. "Corporate Governance Russia: of First-order Importance," Journal of the New Economic Association, New Economic Association, vol. 13(1), pages 154-157.
  5. Pierre Chaigneau & Nicolas Sahuguet, 2014. "Explaining the Association between Monitoring and Controversial CEO Pay Practices: an Optimal Contracting Perspective," Cahiers de recherche 1406, CIRPEE.
  6. Erich Battistin & Paolo Bortoluzzi & Fabio Buttignon & Martina Serafini & Marco Vedovato, 2013. "The Effects of Private Equity on Targets: Majority versus Minority Investments," "Marco Fanno" Working Papers 0167, Dipartimento di Scienze Economiche "Marco Fanno".
  7. Bourjade, Sylvain & Germain, Laurent, 2011. "Collusion in board of directors," MPRA Paper 34814, University Library of Munich, Germany.
  8. Asker, John & Farre-Mensa, Joan & Ljungqvist, Alexander P., 2010. "Does the Stock Market Harm Investment Incentives?," CEPR Discussion Papers 7857, C.E.P.R. Discussion Papers.
  9. Roberto E. Wessels & Tom J. Wansbeek, 2014. "What is the Relation (if any) Between a Firm's Corporate Governance Arrangements and its Financial Performance?," CESifo Working Paper Series 4599, CESifo Group Munich.

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