WWW.DISSERTATION.XLIBX.INFO
FREE ELECTRONIC LIBRARY - Dissertations, online materials
 
<< HOME
CONTACTS



Pages:     | 1 |   ...   | 19 | 20 || 22 |

«Three essays on corporate boards R. Øystein Strøm A dissertation submitted to BI Norwegian School of Management for the degree of Dr.Oecon SERIES ...»

-- [ Page 21 ] --

4.7.3 Board turbulence and firm performance In the case of CEO control, the CEO gets to select the board after showing good firm performance. Till now, I have treated all turnover equally with regard to effects upon board turbulence. But actually, I should differentiate between turnovers leading to better firm performance and those leading to worse. Then the Hermalin and Weisbach (1998) hypothesis should imply that board turbulence increases after the CEO turnover in firms with improved performance. In case of bad performance, the CEO should be changed. Thus, the implication is that board turbulence is unchanged with weak performance after a new CEO enters office.

To perform a test, I categorise firm performance as “improved” or “reduced” in the following way. First, stock returns are year and industry adjusted. I calculate the adjusted stock return Rijt = rijt − r jt /|r jt |, where rijt is the stock return of firm i in industry j in year t, and r jt is the average stock return in industry j in year t. Second, a firm is classified as

4.7. ECONOMETRIC EVIDENCE 129 “improved” if the two-year average adjusted stock return following the CEO turnover year is higher than the two-year average stock return before turnover, that is, if 1/2 Rij1 + Rij2 1/2 Rij−1 + Rij−2. Correspondingly, the firm falls in the “reduced” category if the adjusted stock return is lower than before turnover, calculated in the same manner as the improved. Thus, the measure excludes year 0 when a new CEO is recorded.

This is done in order to avoid observations that the new CEO may for example initiate a “big bath”, whereby the firm’s financial position is made to look unfavourable, or contrarily, whereby he or she tries to increase shareholder expectations to the firm leading to higher stock return. Murphy and Zimmermann (1993) document evidence of such behaviour.

Figure 4.4 shows board turbulence around the year of CEO turnover for improved and reduced firm performance companies.

Figure 4.4

It turns out that in firms with improved stock return, the board turbulence increases before the turnover year, and falls thereafter. Except for high values in the tails, the board turbulence is highest in the turnover year. The same general pattern is repeated in firms with reduced stock return. Again excepting the high values in the tails, the turnover year has the highest turbulence in this category as well. Also, the level of board turbulence is about the same in the two types of firm, although they may differ in particular years. No pattern emerges from the difference in average board turbulence between the two types. Thus, a striking similarity is evident for both types of firms.

This is very much against the CEO control hypothesis. Instead CEO and directors tend to leave together. They appear to be a team, that is, the case of joint control is confirmed.

I make a rigorous test by creating dummy variables for firms that experience an improved performance after the CEO turnover and firms that have weaker performance. Given the information in figure 4.4, I should expect the effects to be negligible for both variables. Table 4.7 shows results.

–  –  –

Again overall statistics of the regressions are satisfactory. As expected from figure 4.4, the dummy variables are not important. They are not significant in any regression. The exclusion restriction test further confirms

CHAPTER 4. BOARD CONTROL

this conclusion. The test says that no confirmation of non-zero coefficients can be given. I cannot confirm the CEO control hypothesis that good performance leads to higher board turbulence following CEO turnover.

A comparison of the coefficient values in table 4.7 to the corresponding values in table 4.6 shows a very close similarity. The same variables as before are the significant ones. The only noticeable difference is that the employee directors variable has become significant to a greater extent.

Thus, having employee directors on the board reduces board turbulence among shareholder elected directors.

4.8 Conclusions

The CEO appointments and dismissals are part of the board’s primary functions (Monks and Minow, 2001). When the board is unable to fulfil this task for some reason, the potential for agency cost increases. Berle Jr. and Means (1932) described how the CEO in effect chooses his own board, which comes about when ownership and control are separate. The monitored CEO elects his own monitors. The board becomes “endogenously determined” (Hermalin and Weisbach, 1998). Therefore the CEO and director turnover constitute a natural setting for studying manifestations of agency problems. This has been exploited in the empirical literature for CEO-chairman duality (Goyal and Park, 2002) and a staggered board (Falaye, 2007), and both imply a lower CEO turnover. The fact that company law bans both CEO-chairman duality and staggered boards in Norway (Aarbakke et al., 1999) makes the institutional setting favourable for the study of the relative timing of CEO turnover and board changes, and may reveal whether CEO control needs some form of regulatory protection to be realised.

In this paper, I use the timing of CEO turnover relative to director substitutions and board enlargements to characterize the distribution of control between the CEO and the board. I differentiate between three forms of control. CEO control happens when the CEO chooses his own board. Then the CEO stays and directors are substituted, or new are added. Shareholder control is the case when the board fulfils its primary functions of hiring and firing the CEO. When this is so, CEO turnover tends to be unrelated to director turnover. The third case is joint control, when the CEO and the board together constitute a team and are jointly responsible for firm performance. Then CEO turnover tends to be simultaneous with director turnover. Thus, the timing of CEO and director turnover should

4.8. CONCLUSIONS 131





reveal the board control type, and thereby the seriousness of agency costs.

The shareholders have no part to play in the choice of directors under CEO control. Therefore shareholders’ influence over the election of directors varies from none in the case of CEO control to high in the cases of shareholder and joint control. At the same time, if the election and hiring processes are functioning correctly, owners should have no influence over the choice of CEO. Thus, the influence of ownership on the election of directors and the hiring of a CEO can further differentiate between types of board control.

CEO turnover is the dependent variable in one type of regressions, with former and simultaneous board turbulence as explanatory variables together with other variables. In the other type of regressions, the roles are reversed, with board turbulence as the dependent. Now the simultaneous and former CEO turnovers are explanatory variables. The regressions show that simultaneity is important and significant in both types of regressions. However, the most important in the board turbulence regressions is the former CEO turnover, indicating that board changes take place after the CEO has taken office. These results hold across different specifications of CEO turnover, from the all CEO turnover to forced, and across definition of firm performance, that is, stock return and return on assets.

Thus, the CEO turnover and the board turbulence regressions do not give a clear-cut answer regarding the location of board control.

However, the results for outside ownership concentration point towards joint or shareholder control. Higher outside ownership concentration implies that board turbulence increases, while no significant relation to CEO turnover can be detected. Thus, the shareholders wield their inuence through the board. A more independent board is less likely to fire a CEO and is itself less likely to be changed. Consistent with Fich and Shivdasani (2006) busy directors are less likely to fire the CEO. The joint control result is further confirmed from the entrenchment variables, as these turn out to be either non-significant, or the reverse of expectations for the imported CEO in the CEO turnover regressions. Both the results for the individual variables, and the fact that they all point in the same direction indicate that the board control is of the joint control type.

My main conclusion is that the control type between CEO and directors is one of joint control, that is, the CEO and directors together constitute a team. This supports the friendly board hypothesis of Adams and Ferreira (2007).

Thus, the data do not support the Hermalin and Weisbach (1998) hyCHAPTER 4. BOARD CONTROL pothesis that board composition is endogenously determined. It seems that CEO control can only be realised if some protection is given, for instance in the form of CEO-chairman duality or a staggered board, shown in Goyal and Park (2002) and Falaye (2007). The results in this paper show that when such protection is not in place, shareholders are important in choosing directors. By implication, for the CEO to gain control over the board, regulations must favour CEO protection.

Bibliography Aarbakke, M., J. Skåre, G. Knudsen, T. Ofstad, and A. Aarbakke (1999).

Aksjeloven og Allmennaksjeloven. Oslo: Tano Aschehoug.

Adams, R. B. and D. Ferreira (2007, Feb). A theory of friendly boards.

Journal of Finance 62(1), 217–250.

Almazan, A. and J. Suarez (2003, Apr). Entrenchment and severance pay in optimal governance structures. Journal of Finance 58(2), 519–548.

Amemiya, T. and T. E. MaCurdy (1986). Instrumental-variable estimation of an error-components model. Econometrica 54, 869–880.

Barclay, M. J. and C. G. Holderness (1992). The law and large block trades.

Journal of Law and Economics 35, 265–294.

Berle Jr., A. A. and G. C. Means (1932). The Modern Corporation and Private Property. Chicago: Commons Clearing House.

Bøhren, Ø., S. Sharma, and T. Vegarud (2002). Eierstyring i store norske selskaper: oppsigelse av toppleder. In Corporate Governance i et norsk perspektiv, pp. 124–137.

Bøhren, Ø. and R. Ø. Strøm (2007, Feb). Aligned, informed, and decisive:

Characteristics of value-creating boards. Working Paper, BI-Norwegian School of Management.

Bolton, P. and E. von Thadden (1998). Blocks, liquidity, and corporate control. Journal of Finance 53, 1–25.

–  –  –

Breusch, T. S., G. E. Mizon, and P. Schmidt (1989). Efficient estimation using panel data. Econometrica 57(3), 695–700.

Coffee, J. C. (1990). Unstable coalitions: Corporate governance as a multiplayer game. Georgetown Law Journal 78(5), 1495–1549.

Conyon, M. J. and M. R. Muldoon (2006). The small world of corporate boards. Journal of Business Finance & Accounting 33(9), 1321–1343.

Coughlan, A. T. and R. M. Schmidt (1985). Executive compensation, management turnover, and firm performance. Journal of Accounting and Economics 7, 43–66.

Dahya, J., J. J. McConnell, and N. G. Travlos (2002, Feb). The Cadbury committee, corporate performance, and top management turnover. Journal of Finance 57(1), 461–484.

Davidson, R. and J. G. MacKinnon (1993). Estimation and Inference in Econometrics. Oxford: Oxford University Press.

Denis, D. J. and D. K. Denis (1995, Sep). Performance changes following top management dismissals. Journal of Finance 50(4), 1029–1057.

Falaye, O. (2007). Classified boards, firm value, and managerial entrenchment. Journal of Financial Economics 83, 501–529.

Fama, E. F. (1980, Apr). Agency problems and the theory of the firm. Journal of Political Economy 88(2), 288–307.

Fama, E. F. and M. C. Jensen (1983). Separation of ownership and control.

Journal of Law and Economics 26, 301–325.

Farrell, K. A. and D. A. Whidbee (2000, Oct). The consequences of forced CEO succession for outside directors. Journal of Business 73(4), 597–628.

Ferris, S. P., M. Jagannathan, and A. Pritchard (2003, Jun). Too busy to mind the business? Monitoring by directors with multiple board appointments. Journal of Finance 58(3), 1087–1111.

Fich, E. M. and A. Shivdasani (2006, Apr). Are busy boards effective monitors? Journal of Finance 61(2), 689–724.

–  –  –

Franks, J. and C. Mayer (2001, Winter). Ownership and control of German corporations. Review of Financial Studies 14(4), 943–978.

Gilson, R. J. and R. Kraakman (1991, Apr). Reinventing the outside director: An agenda for institutional investors. Stanford Law Review 43.

Gilson, S. C. (1990). Bankruptcy, boards, banks, and bondholders: Evidence on changes in corporate ownership and control when firms default. Journal of Financial Economics 27, 355–388.

Goyal, V. K. and C. W. Park (2002). Board leadership and CEO turnover.

Journal of Corporate Finance 8, 49–66.

Greene, W. H. (2003). Econometric Analysis (5th ed.). New York: Prentice Hall.

Hadlock, C. J. and G. B. Lumer (1997). Compensation, turnover, and top management incentives: Historical evidence. Journal of Business 70(2), 153–187.

Harford, J. (2003, Jul). Takeover bids and target directors’ incentives: The impact of a bid on directors’ wealth and board seats. Journal of Financial Economics 69(1), 51–84.

Hermalin, B. E. and M. S. Weisbach (1988). The determinants of board composition. RAND Journal of Economics 19(4), 589–606.

Hermalin, B. E. and M. S. Weisbach (1998, Mar). Endogenously chosen boards of directors and their monitoring of the CEO. American Economic Review 88(1), 96–118.

Hirschman, A. O. (1970). Exit, Voice and Loyalty. Responses to Decline in Firms, Organizations, and States. Cambridge, Mass.: Harvard University Press.

Huson, M. R., R. Parrino, and L. T. Starks (2001, Dec). Internal monitoring mechanisms and CEO turnover: A long-term perspective. Journal of Finance 56(6), 2265–2298.

Jensen, M. C. (1988). Takeovers: Their causes and consequences. Journal of Economic Perspectives 2, 21–48.

Jensen, M. C. and W. Meckling (1976). Theory of the firm: Managerial behavior, agency costs, and ownership structure. Journal of Financial Economics 3, 305–360.

BIBLIOGRAPHY 135 Jensen, M. C. and R. Ruback (1983). The market for corporate control: The scientific evidence. Journal of Financial Economics 11, 5–50.



Pages:     | 1 |   ...   | 19 | 20 || 22 |


Similar works:

«#NASSReportCard Series (June 2015 to June 2016) SAM ONUIGBO, 1st Time Member of the 8th House of Representatives Federal Constituency: Ikwuano/ Umuahia North/ South, Abia State Position: Chairman, House Committee on Climate Change Brief Profile: Samuel Ifeanyi Onuigbo was born in Umuahia on 1st of October, 1960, same day Nigeria gained independence from Great Britain. He had his early education in Ikwuano before proceeding to Alvan Ikoku College of Education, Owerri, Imo State to acquire the...»

«Stanley Fischer: Monetary policy, financial stability, and the zero lower bound Speech by Mr Stanley Fischer, Vice Chair of the Board of Governors of the Federal Reserve System, at the Annual Meeting of the American Economic Association, San Francisco, California, 3 January 2016. * * * I am grateful to James Clouse, William English, Thomas Laubach, Nellie Liang, David Lopez-Salido, Jeff Marquardt, David Mills, Fabio Natalucci, David Reifschneider, Stacey Tevlin, David Wilcox, and Paul Wood for...»

«MAGAZINE FOR BUSINESS PARTNERS AND EMPLOYEES EDITION FEBR UARY 20 14 Contents Food Ingredients Europe 2013 in review 2 Emsland Group Webinars 2014 3 Germany‘s first straw-fired heating plant 4 Emsland Group at Building Materials Conference in Kuala Lumpur 5 Update on the new Food Innovation Center 6 Flake production in Emlichheim 7 Emsland Group at the 3. Starch World 2014 8 Further advancements in the SOS-System 9 Workers' Council Elections in Emlichheim 10 Emsland-Stärke GmbH A company of...»

«Manchester Business School Research Seminar – June 18, 2008 STRATEGY AND STRATEGIC MANAGEMENT ACCOUNTING: AN INVESTIGATION OF ORGANIZATIONAL CONFIGURATIONS Authors: Cadez Simon Faculty of Economics University of Ljubljana Kardeljeva ploscad 17 1000 Ljubljana Slovenija E-mail: simon.cadez@ef.uni-lj.si Guilding Chris Centre for Tourism, Sport and Service Innovation Griffith University Gold Coast Campus PMB 50 Gold Coast Mail Centre Queensland 9726 Australia E-mail: c.guilding@griffith.edu.au...»

«European Finance Review 6: 163–187, 2002. 163 © 2002 Kluwer Academic Publishers. Printed in the Netherlands. Do Firms Use Derivatives to Reduce their Dependence on External Capital Markets? TIM R. ADAM Hong Kong University of Science & Technology, Department of Finance, Clear Water Bay, Kowloon, Hong Kong. E-mail: adam@ust.hk. Abstract. This study investigates if the use of derivatives by corporations is likely to affect their financing strategies. I find a strong positive relation between...»

«K.7 Have Global Value Chains Contributed to Global Imbalances? Haltmaier, Jane Please cite paper as: Haltmaier, Jane (2015). Have Global Value Chains Contributed to Global Imbalances?. International Finance Discussion Papers 1154. http://dx.doi.org/10.17016/IFDP.2015.1154 International Finance Discussion Papers Board of Governors of the Federal Reserve System Number 1154 December 2015 Board of Governors of the Federal Reserve System International Finance Discussion Papers Number 1154 December...»

«Neither Sex, Money, nor Power: Why Elizabeth t :: Finally Says “Yes!” i eL AIne BAnDeR elaine Bander is retired from the english Department of Dawson College (Montreal). Currently JASnA (Canada) president and Montreal Regional Coordinator, she has spoken at many AGMs and regional meetings. She is also Coordinator of the 2014 AGM: “Mansfield Park in Montreal: Contexts, Conventions, and Controversies.” It is a truth universally acknowledged that popular media articles about Jane...»

«12. MODELLING THE FINANCIAL PERFORMANCE OF THE BUILDING SECTOR ENTERPRISES – THE CASE OF ROMANIA1 -MIùU Nicoleta B RBU Abstract In this paper I have designed an aggregate index of financial performance for the building sector enterprises from Gala i Romania. The creation and calculation of an index of financial performance is a personal contribution to the financial sector analysis of enterprises in our country. The development at national level of the financial performance assessment model...»

«PUBLISHED BOOKS Friedman, A., The Grow Home, McGill-Queen’s University Press, Montréal, 2001 (208 pp.). In The Grow Home, Avi Friedman recounts the genesis and development of this innovative project. Like the auto industry’s approach to the economy car, Friedman’s Grow Home gives people what they need in a house at an affordable price a quality product that allows both the perimeter and interior of a house to be expanded and changed to fit the space needs and budget of its owners. Frills...»

«Università degli Studi di Salerno Centro di Economia del Lavoro e di Politica Economica Niall O’Higgins CELPE DISES Recent Trends in Youth Labour Markets and Youth Employment Policy in Europe and Central Asia Discussion Paper 85 Ottobre, 2004 CELPE Centro di Economia del Lavoro e di Politica Economica Università degli Studi di Salerno Via Ponte Don Mellillo, 84084 Fisciano, IItaly Web Page:http://www.celpe.unisa.it/ E-mail: celpe@unisa.it Scientific Commitee: Adalgiso Amendola, Guido Cella,...»

«Farming Families and Succession Sort out the Soft Stuff Kellogg Rural Leaders Programme Mark Stevenson November, 2013 Executive Summary Family farming operations form the basis of New Zealand’s rural sector. The continued success of the New Zealand economy is reliant on a productive and vibrant rural sector. Effective farm succession has a considerable part to play in continuing this vibrancy. Family Farm Succession is “the process of transitioning the management and ownership of the...»

«Using instrumental variables techniques in economics and finance Christopher F Baum1 Boston College and DIW Berlin German Stata Users Group Meeting, Berlin, June 2008 1 Thanks to Mark Schaffer for a number of useful suggestions. Christopher F Baum (Boston College, DIW) IV techniques in economics and finance DESUG, Berlin, June 2008 1 / 49 Introduction What are instrumental variables (IV) methods? Most widely known as a solution to endogenous regressors: explanatory variables correlated with...»





 
<<  HOME   |    CONTACTS
2016 www.dissertation.xlibx.info - Dissertations, online materials

Materials of this site are available for review, all rights belong to their respective owners.
If you do not agree with the fact that your material is placed on this site, please, email us, we will within 1-2 business days delete him.