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Board Independence and CEO Turnover

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  • VOLKER LAUX

Abstract

ABSTRACT This paper analyzes how board independence affects the CEO's ability to extract rents from the firm. The CEO is assumed to possess private information about his ability, which the board needs in order to decide whether to replace him. If the board is more active in removing low quality CEOs, the incumbent is better able to use his information advantage to extract rents. Since the board cannot commit not to renegotiate the contract, a board that is fully independent from the CEO is more active than is efficient ex ante. For this reason, shareholders are better off if the board of directors lacks some independence. The model predicts that a trend toward greater board independence is associated with subsequent trends toward higher CEO turnover, more generous severance packages, and larger stock option grants. Copyright University of Chicago on behalf of the Institute of Professional Accounting, 2008.

Suggested Citation

  • Volker Laux, 2008. "Board Independence and CEO Turnover," Journal of Accounting Research, Wiley Blackwell, vol. 46(1), pages 137-171, March.
  • Handle: RePEc:bla:joares:v:46:y:2008:i:1:p:137-171
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    Cited by:

    1. Van Wesep, Edward D. & Wang, Sean, 2014. "The prevention of excess managerial risk taking," Journal of Corporate Finance, Elsevier, vol. 29(C), pages 579-593.
    2. repec:bla:stratm:v:38:y:2017:i:13:p:2623-2646 is not listed on IDEAS
    3. Buchwald, Achim & Hottenrott, Hanna, 2015. "Women on the board and executive duration: Evidence for European listed firms," DICE Discussion Papers 178, University of Düsseldorf, Düsseldorf Institute for Competition Economics (DICE).
    4. Zona, Fabio, 2014. "Board leadership structure and diversity over CEO time in office: A test of the evolutionary perspective on Italian firms," European Management Journal, Elsevier, vol. 32(4), pages 672-681.
    5. repec:bla:jrinsu:v:84:y:2017:i:1:p:95-126 is not listed on IDEAS
    6. Huang, Chia-Wei & Lin, Chih-Yen, 2016. "Do aircraft perquisites cause CEOs to withhold bad news?," The North American Journal of Economics and Finance, Elsevier, vol. 35(C), pages 189-202.
    7. Ojo, Marianne, 2016. "E commerce as a tool for resource expansion: postal partnerships, data protection legislation and the mitigation of implementation gaps," MPRA Paper 70175, University Library of Munich, Germany.
    8. repec:eee:jaecon:v:63:y:2017:i:2:p:253-261 is not listed on IDEAS
    9. repec:eee:jaecon:v:64:y:2017:i:1:p:37-55 is not listed on IDEAS
    10. Marco Pagano & Giovanni Immordino, 2012. "Corporate Fraud, Governance, and Auditing," Review of Corporate Finance Studies, Oxford University Press, vol. 1(1), pages 109-133.
    11. Allgood, Sam & Farrell, Kathleen A. & Kamal, Rashiqa, 2012. "Do boards know when they hire a CEO that is a good match? Evidence from initial compensation," Journal of Corporate Finance, Elsevier, vol. 18(5), pages 1051-1064.
    12. Hazarika, Sonali & Karpoff, Jonathan M. & Nahata, Rajarishi, 2012. "Internal corporate governance, CEO turnover, and earnings management," Journal of Financial Economics, Elsevier, vol. 104(1), pages 44-69.
    13. Masulis, Ronald & Ruzzier, Christian & Xiao, Sheng & Zhao, Shan, 2012. "Do Independent Expert Directors Matter?," MPRA Paper 68200, University Library of Munich, Germany.
    14. Miriam Schwartz-Ziv & Michael Weisbach, 2011. "What do Boards Really Do? Evidence from Minutes of Board Meetings," NBER Working Papers 17509, National Bureau of Economic Research, Inc.
    15. Hadem, Michael, 2010. "Bedingungen und Konsequenzen des Wechsels von Finanzvorständen - Eine Analyse in großen börsennotierten Unternehmen," EconStor Theses, ZBW - German National Library of Economics, number 43681.
    16. repec:bla:stratm:v:37:y:2016:i:13:p:2695-2708 is not listed on IDEAS
    17. repec:eee:corfin:v:48:y:2018:i:c:p:428-441 is not listed on IDEAS
    18. Lin, Zhijun & Song, Byron Y. & Tian, Zhimin, 2016. "Does director-level reputation matter? Evidence from bank loan contracting," Journal of Banking & Finance, Elsevier, vol. 70(C), pages 160-176.
    19. Schwartz-Ziv, Miriam & Weisbach, Michael S., 2013. "What do boards really do? Evidence from minutes of board meetings☆☆Miriam Schwartz-Ziv is from Harvard University and Northeastern University, e-mail: miriam.schwartz@mail.huji.ac.il. Michael S. Weisb," Journal of Financial Economics, Elsevier, vol. 108(2), pages 349-366.
    20. repec:eee:reacre:v:22:y:2010:i:1:p:18-28 is not listed on IDEAS

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