Alternative Mechanisms for Corporate Control

We examine performance and management characteristics of Fortune 500 firms experiencing one of three types of control change: internally precipitated management turnover, hostile takeover, and friendly takeover. We find that firms experiencing internally precipitated management turnover perform poorly relative to other firms in their industries, but are not concentrated in poorly performing industries. In contrast, targets of hostile takeovers are concentrated in troubled industries. There is also weaker evidence that hostile takeover targets underperform their industry peers. We interpret this evidence as consistent with the idea that the board of directors is capable of firing managers whose leadership leads to poor performance relative to industry, but that an external challenge in the form of a hostile takeover is often required when the whole industry is in decline. The evidence also indicates that firms run by a member of the founding family are less likely to experience either internally precipitated top management turnover or a hostile takeover. On the other hand, firms whose top management team is dominated by a single, relatively young top executive, while lacking in internal discipline, are more likely to experience a hostile takeover.