Hostname: page-component-78c5997874-v9fdk Total loading time: 0 Render date: 2024-11-15T01:36:42.949Z Has data issue: false hasContentIssue false
  • English
  • Français

CEOs Under Fire: The Effects of Competition from Inside Directors on Forced CEO Turnover and CEO Compensation

Published online by Cambridge University Press:  14 June 2013

Shawn Mobbs
Shawn Mobbs*
Affiliation:
smobbs@cba.ua.edu, Culverhouse College of Commerce and Business Administration, University of Alabama, Box 870224, Tuscaloosa, AL 35487
Get access Rights & Permissions [Opens in a new window]

Abstract

This study examines board monitoring when a credible chief executive officer (CEO) replacement is on the board. Inside directors whose talents are in greater demand externally, as reflected by their holding outside directorships, are more likely to become CEOs, and their presence is associated with greater forced CEO turnover sensitivity to accounting performance and CEO compensation sensitivity to stock performance. These results reveal that certain insiders strengthen board monitoring by serving as a readily available CEO replacement and contradict the presumption that all insiders are under CEO control. Furthermore, the results persist when accounting for the endogenous firm selection of talented inside directors.

Type
Research Articles
Information
Journal of Financial and Quantitative Analysis , Volume 48 , Issue 3 , June 2013 , pp. 669 - 698
Copyright
Copyright © Michael G. Foster School of Business, University of Washington 2013 

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

References

Adams, R.; Almeida, H.; and Ferreira, D.. “Powerful CEOs and Their Impact on Corporate Performance.” Review of Financial Studies, 18 (2005), 1403–1432.CrossRefGoogle Scholar
Adams, R., and Ferreira, D.. “A Theory of Friendly Boards.” Journal of Finance, 62 (2007), 217–250.CrossRefGoogle Scholar
Aggarwal, R. K., and Samwick, A. A.. “Performance Incentives within Firms: The Effect of Managerial Responsibility.” Journal of Finance, 58 (2003), 1619–1643.CrossRefGoogle Scholar
Ai, C., and Norton, E. C.. “Interaction Terms in Logit and Probit Models.” Economic Letters, 80 (2003), 123–129.CrossRefGoogle Scholar
Baranchuk, N., and Dybvig, P.. “Consensus in Diverse Corporate Boards.” Review of Financial Studies, 22 (2009), 715–747.CrossRefGoogle Scholar
Barber, B., and Lyon, J.. “Detecting Abnormal Operating Performance: The Empirical Power and Specification of Test Statistics.” Journal of Financial Economics, 41 (1996), 359–399.CrossRefGoogle Scholar
Bebchuk, L., and Fried, J.. “Executive Compensation as an Agency Problem.” Journal of Economic Perspectives, 17 (2003), 71–92.CrossRefGoogle Scholar
Black, F., and Scholes, M.. “The Pricing of Options and Corporate Liabilities.” Journal of Political Economy, 81 (1973), 637–654.CrossRefGoogle Scholar
Borokhovich, K. A.; Parrino, R.; and Trapani, T.. “Outside Directors and CEO Selection.” Journal of Financial and Quantitative Analysis, 31 (1996), 337–355.CrossRefGoogle Scholar
Bouwman, C. “Corporate Governance Propagation through Overlapping Directors.” Review of Financial Studies, 24 (2011), 2358–2394.CrossRefGoogle Scholar
Boyer, M. M., and Ortiz-Molina, H.. “Career Concerns of Top Executives, Managerial Ownership and CEO Succession.” Corporate Governance: An International Review, 16 (2008), 178–193.CrossRefGoogle Scholar
Chhaochharia, V., and Grinstein, Y.. “CEO Compensation and Board Structure.” Journal of Finance, 64 (2009), 231–261.CrossRefGoogle Scholar
Coles, J.; Daniel, N.; and Naveen, L.. “Managerial Incentives and Risk-Taking.” Journal of Financial Economics, 79 (2006), 431–468.CrossRefGoogle Scholar
Coles, J.; Daniel, N.; and Naveen, L.. “Boards: Does One Size Fit All?” Journal of Financial Economics, 87 (2008), 329–356.CrossRefGoogle Scholar
Coles, J.; Lemmon, M.; and Meschke, J. F.. “Structural Models and Endogeneity in Corporate Finance: The Link between Managerial Ownership and Corporate Performance.” Journal of Financial Economics, 103 (2012), 149–168.CrossRefGoogle Scholar
Core, J. E., and Guay, W. R.. “Estimating the Value of Employee Stock Option Portfolios and Their Sensitivities to Price and Volatility.” Journal of Accounting Research, 40 (2002), 613–630.CrossRefGoogle Scholar
Core, J. E.; Guay, W. R.; and Larcker, D. F.. “Executive Equity Compensation and Incentives: A Survey.” FRBNY Economic Policy Review, 9 (2003), 27–50.Google Scholar
Core, J. E.; Holthausen, R. W.; and Larcker, D. F.. “Corporate Governance, Chief Executive Officer Compensation, and Firm Performance.” Journal of Financial Economics, 51 (1999), 371–406.CrossRefGoogle Scholar
Drymiotes, G. “The Monitoring Role of Insiders.” Journal of Accounting and Economics, 44 (2007), 359–377.CrossRefGoogle Scholar
Evans, W. N., and Schwab, R. M.. “Finishing High School and Starting College: Do Catholic Schools Make a Difference?” Quarterly Journal of Economics, 110 (1995), 941–974.CrossRefGoogle Scholar
Falato, A.; Li, D.; and Milbourn, T.. “To Each According to His Ability? The Returns to CEO Talent.” Working Paper, Federal Reserve Board (2011).CrossRefGoogle Scholar
Fama, E. F. “Agency Problems and the Theory of the Firm.” Journal of Political Economy, 88 (1980), 288–307.CrossRefGoogle Scholar
Fama, E. F., and French, K. R.. “Industry Costs of Equity.” Journal of Financial Economics, 43 (1997), 153–193.CrossRefGoogle Scholar
Fama, E. F., and Jensen, M.. “Separation of Ownership and Control.” Journal of Law and Economics, 26 (1983), 301–325.CrossRefGoogle Scholar
Fee, C. E., and Hadlock, C. J.. “Management Turnover across the Corporate Hierarchy.” Journal of Accounting and Economics, 37 (2004), 3–38.CrossRefGoogle Scholar
Fich, E., and Shivdasani, A.. “Are Busy Boards Effective Monitors?” Journal of Finance, 61 (2006), 689–724.CrossRefGoogle Scholar
Gibbons, R., and Murphy, K.. “Optimal Incentive Contracts in the Presence of Career Concerns: Theory and Evidence.” Journal of Political Economy, 100 (1992), 468–505.CrossRefGoogle Scholar
Guo, L., and Masulis, R.. “Board Structure and Monitoring: New Evidence from CEO Turnover.” Working Paper, University of New South Wales (2012).CrossRefGoogle Scholar
Guthrie, K.; Sokolowsky, J.; and Wan, K. M.. “CEO Compensation and Board Structure Revisited.” Journal of Finance, 67 (2012), 1149–1168.CrossRefGoogle Scholar
Hallock, K. “Reciprocally Interlocking Boards of Directors and Executive Compensation.” Journal of Financial and Quantitative Analysis, 32 (1997), 331–344.CrossRefGoogle Scholar
Harris, M., and Raviv, A.. “A Theory of Board Control and Size.” Review of Financial Studies, 21 (2008), 1797–1832.CrossRefGoogle Scholar
Heckman, J. J. “Sample Selection as a Specification Error.” Econometrica, 47 (1979), 153–161.CrossRefGoogle Scholar
Helmich, D. L. “Organizational Growth and Succession Patterns.” Academy of Management Journal, 17 (1974), 771–775.CrossRefGoogle Scholar
Helmich, D. L., and Brown, W. B.. “Successor Type and Organizational Change in the Corporate Enterprise.” Administrative Science Quarterly, 17 (1972), 371–381.CrossRefGoogle Scholar
Hermalin, B. “Trends in Corporate Governance.” Journal of Finance, 60 (2005), 2351–2384.CrossRefGoogle Scholar
Hermalin, B. E., and Weisbach, M. S.. “The Determinants of Board Composition.” Rand Journal of Economics, 19 (1988), 589–606.CrossRefGoogle Scholar
Hermalin, B. E., and Weisbach, M. S.. “Endogenously Chosen Boards of Directors and Their Monitoring of the CEO.” American Economic Review, 88 (1998), 96–118.Google Scholar
Hermalin, B. E., and Weisbach, M. S.. “Boards of Directors as an Endogenously Determined Institution: A Survey of the Economic Literature.” FRBNY Economic Policy Review, 9 (2003), 7–26.Google Scholar
Huson, M. R.; Malatesta, P. H.; and Parrino, R.. “Managerial Succession and Firm Performance.” Journal of Financial Economics, 74 (2004), 237–275.CrossRefGoogle Scholar
Huson, M. R.; Parrino, R.; and Starks, L.. “Internal Monitoring Mechanisms and CEO Turnover: A Long-Term Perspective.” Journal of Finance, 56 (2001), 2265–2297.CrossRefGoogle Scholar
Hwang, B., and Kim, S.. “It Pays to Have Friends.” Journal of Financial Economics, 93 (2009),138–158.CrossRefGoogle Scholar
Jensen, M., and Meckling, W.. “Theory of the Firm: Managerial Behavior, Agency Costs and Ownership Structure.” Journal of Financial Economics, 3 (1976), 305–360.CrossRefGoogle Scholar
Jensen, M., and Murphy, K.. “Performance Pay and Top-Management Incentives.” Journal of Political Economy, 98 (1990), 225–264.CrossRefGoogle Scholar
Jenter, D., and Lewellen, K.. “Performance-Induced CEO Turnover.” Working Paper, Stanford University (2010).CrossRefGoogle Scholar
Jiang, W.; Li, K.; and Wang, W.. “Hedge Funds and Chapter 11.” Journal of Finance, 67 (2012) 513–560.CrossRefGoogle Scholar
Knyazeva, A.; Knyazeva, D.; and Masulis, R.. “The Supply of Corporate Directors and Board Independence.” Review of Financial Studies, 26 (2013), 1561–1605.CrossRefGoogle Scholar
Masulis, R., and Mobbs, S.. “Are All Inside Directors the Same? Evidence from the External Directorship Market.” Journal of Finance, 66 (2011), 823–872.CrossRefGoogle Scholar
Mehran, H. “Executive Compensation Structure, Ownership, and Firm Performance.” Journal of Financial Economics, 38 (1995), 163–184.CrossRefGoogle Scholar
Mobbs, S., and Raheja, C.. “Internal Managerial Promotions: Insider Incentives and CEO Succession.” Journal of Corporate Finance, 18 (2012), 1337–1353.CrossRefGoogle Scholar
Murphy, K. “Executive Compensation.” In Handbook of Labor Economics, Ashenfelter, O. and Cards, D., eds. Amsterdam: North-Holland (1999), 2485–2563.Google Scholar
Naveen, L. “Organizational Complexity and Succession Planning.” Journal of Financial and Quantitative Analysis, 41 (2006), 661–683.CrossRefGoogle Scholar
Parrino, R. “CEO Turnover and Outside Succession: A Cross-Sectional Analysis.” Journal of Financial Economics, 46 (1997), 165–197.CrossRefGoogle Scholar
Parrino, R.; Sias, R.; and Starks, L.. “Voting with Their Feet: Institutional Ownership Changes around Forced CEO Turnover.” Journal of Financial Economics, 68 (2003), 3–46.CrossRefGoogle Scholar
Perry, T., and Peyer, U.. “Board Seat Accumulation by Executives: A Shareholder’s Perspective.” Journal of Finance, 60 (2005), 2083–2123.CrossRefGoogle Scholar
Powers, E. A. “Interpreting Logit Regressions with Interactive Terms: An Application to the Management Turnover Literature.” Journal of Corporate Finance, 11 (2005), 504–522.CrossRefGoogle Scholar
Raheja, C. “Determinants of Board Size and Composition: A Theory of Corporate Boards.” Journal of Financial and Quantitative Analysis, 40 (2005), 283–305.CrossRefGoogle Scholar
Rajan, R. G., and Wulf, J.. “The Flattening Firm: Evidence from Panel Data on the Changing Nature of Corporate Hierarchies.” Review of Economics and Statistics, 88 (2006), 759–773.CrossRefGoogle Scholar
Ryan, H., and Wiggins, R.. “Who Is in Whose Pocket? Director Compensation, Board Independence, and Barriers to Effective Monitoring.” Journal of Financial Economics, 73 (2004), 497–524.CrossRefGoogle Scholar
Warner, J.; Watts, R.; and Wruck, K.. “Stock Prices and Top Management Changes.” Journal of Financial Economics, 20 (1988), 461–492.CrossRefGoogle Scholar
Weisbach, M. “Outside Directors and CEO Turnover.” Journal of Financial Economics, 20 (1988), 431–460.CrossRefGoogle Scholar
White, H. “A Heteroskedasticity-Consistent Covariance Matrix Estimator and a Direct Test ofHeteroskedasticity.” Econometrica, 48 (1980), 817–838.CrossRefGoogle Scholar