Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/43568 
Year of Publication: 
2010
Series/Report no.: 
Nota di Lavoro No. 2010,30
Publisher: 
Fondazione Eni Enrico Mattei (FEEM), Milano
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.
Subjects: 
Corporate Governance
Large Shareholders
Boards of Directors
CEO Turnover
Legal Reforms
Transition Economies
Private Equity
JEL: 
G34
G24
G32
K22
O16
P21
Document Type: 
Working Paper

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