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Monitoring Managers: Does it Matter?

Author

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  • Francesca Cornelli

    (London Business School and CEPR)

  • Zbigniew Kominek

    (European Bank for Reconstruction and Development (EBRD))

  • Alexander Ljungqvist

    (Stern School of Business, New York University, ECGI 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.

Suggested Citation

  • Francesca Cornelli & Zbigniew Kominek & Alexander Ljungqvist, 2010. "Monitoring Managers: Does it Matter?," Working Papers 2010.30, Fondazione Eni Enrico Mattei.
  • Handle: RePEc:fem:femwpa:2010.30
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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. Metrick, Andrew & Yasuda, Ayako, 2010. "Venture Capital and Other Private Equity: A Survey," Working Papers 11-06, University of Pennsylvania, Wharton School, Weiss Center.
    3. repec:eee:corfin:v:45:y:2017:i:c:p:104-121 is not listed on IDEAS
    4. 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.
    5. 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.
    6. 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.
    7. 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.
    8. Nadya Malenko, 2011. "Communication and Decision-Making in Corporate Boards," 2011 Meeting Papers 449, Society for Economic Dynamics.
    9. repec:pal:jintbs:v:49:y:2018:i:5:d:10.1057_s41267-017-0116-6 is not listed on IDEAS
    10. 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.
    11. repec:eee:pacfin:v:46:y:2017:i:pa:p:191-211 is not listed on IDEAS
    12. 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.
    13. 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.
    14. repec:mfj:journl:v:20:y:2016:i:4:p:323-354 is not listed on IDEAS
    15. 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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    17. 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.
    18. Bourjade, Sylvain & Germain, Laurent, 2011. "Collusion in board of directors," MPRA Paper 34814, University Library of Munich, Germany.
    19. Kim, Kyonghee & Mauldin, Elaine & Patro, Sukesh, 2014. "Outside directors and board advising and monitoring performance," Journal of Accounting and Economics, Elsevier, vol. 57(2), pages 110-131.
    20. repec:bla:jrinsu:v:84:y:2017:i:1:p:95-126 is not listed on IDEAS
    21. 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".
    22. 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.
    23. 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.
    24. Pierre Chaigneau & Nicolas Sahuguet, 2014. "Explaining the Association between Monitoring and Controversial CEO Pay Practices: an Optimal Contracting Perspective," Cahiers de recherche 1406, CIRPEE.
    25. 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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    Keywords

    Corporate Governance; Large Shareholders; Boards of Directors; CEO Turnover; Legal Reforms; Transition Economies; Private Equity;

    JEL classification:

    • G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance
    • 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
    • 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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