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Monitoring Managers: Does it Matter?

Author

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  • Cornelli, Francesca
  • Kominek, Zbigniew
  • Ljungqvist, Alexander P.

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.

Suggested Citation

  • Cornelli, Francesca & Kominek, Zbigniew & Ljungqvist, Alexander P., 2009. "Monitoring Managers: Does it Matter?," CEPR Discussion Papers 7571, C.E.P.R. Discussion Papers.
  • Handle: RePEc:cpr:ceprdp:7571
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    Cited by:

    1. Degeorge, Francois & Martin, Jens & Phalippou, Ludovic, 2016. "On secondary buyouts," Journal of Financial Economics, Elsevier, vol. 120(1), pages 124-145.
    2. Mike Burkart & Konrad Raff, 2015. "Performance Pay, CEO Dismissal, and the Dual Role of Takeovers," Review of Finance, European Finance Association, vol. 19(4), pages 1383-1414.
    3. Cumming, Douglas J. & Grilli, Luca & Murtinu, Samuele, 2017. "Governmental and independent venture capital investments in Europe: A firm-level performance analysis," Journal of Corporate Finance, Elsevier, vol. 42(C), pages 439-459.
    4. Ji, Jiao & Talavera, Oleksandr & Yin, Shuxing, 2016. "CEO Dismissal, Compensation and Topics of Board Meetings: The Case of China," MPRA Paper 70232, University Library of Munich, Germany.
    5. repec:mfj:journl:v:20:y:2016:i:4:p:323-354 is not listed on IDEAS
    6. repec:bla:jrinsu:v:84:y:2017:i:1:p:95-126 is not listed on IDEAS
    7. Roberto Wessels & Tom J. Wansbeek & Lammertjan Dam, 2016. "What is the Relation (if any) Between a Firm's Corporate Governance Arrangements and its Financial Performance?," Multinational Finance Journal, Multinational Finance Journal, vol. 20(4), pages 323-354, December.
    8. Gao, Huasheng & Li, Kai, 2015. "A comparison of CEO pay–performance sensitivity in privately-held and public firms," Journal of Corporate Finance, Elsevier, vol. 35(C), pages 370-388.
    9. Pierre Chaigneau & Nicolas Sahuguet, 2014. "Explaining the Association between Monitoring and Controversial CEO Pay Practices: an Optimal Contracting Perspective," Cahiers de recherche 1406, CIRPEE.
    10. repec:eee:corfin:v:45:y:2017:i:c:p:104-121 is not listed on IDEAS
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    12. repec:pal:jintbs:v:49:y:2018:i:5:d:10.1057_s41267-017-0116-6 is not listed on IDEAS
    13. Adams, Mike & Jiang, Wei, 2016. "Do outside directors influence the financial performance of risk-trading firms? Evidence from the United Kingdom (UK) insurance industry," Journal of Banking & Finance, Elsevier, vol. 64(C), pages 36-51.
    14. Chen, Guojun & Kang, Jun-Koo & Kim, Jin-Mo & Na, Hyun Seung, 2014. "Sources of value gains in minority equity investments by private equity funds: Evidence from block share acquisitions," Journal of Corporate Finance, Elsevier, vol. 29(C), pages 449-474.
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    16. Bourjade, Sylvain & Germain, Laurent, 2011. "Collusion in board of directors," MPRA Paper 34814, University Library of Munich, Germany.
    17. 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.
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    21. Chaigneau, Pierre & Sahuguet, Nicolas, 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.
    22. Metrick, Andrew & Yasuda, Ayako, 2010. "Venture Capital and Other Private Equity: A Survey," Working Papers 11-06, University of Pennsylvania, Wharton School, Weiss Center.
    23. Jacobsen, Stacey, 2014. "The death of the deal: Are withdrawn acquisition deals informative of CEO quality?," Journal of Financial Economics, Elsevier, vol. 114(1), pages 54-83.
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    25. 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".

    More about this item

    Keywords

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

    JEL classification:

    • G24 - Financial Economics - - Financial Institutions and Services - - - Investment Banking; Venture Capital; Brokerage
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance
    • K22 - Law and Economics - - Regulation and Business Law - - - Business and Securities Law
    • O16 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Financial Markets; Saving and Capital Investment; Corporate Finance and Governance
    • P21 - Economic Systems - - Socialist Systems and Transition Economies - - - Planning, Coordination, and Reform

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