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Outside directors and CEO turnover (1988)
| Venue: | Journal of Financial Economics |
| Citations: | 491 - 10 self |
BibTeX
@ARTICLE{Weisbach88outsidedirectors,
author = {Michael !i. Weisbach and Jim Dana and Franklin M. Fisher and Paul Healy and Cliff Holdemess and Bob Kaplan and Mervyn King and Kevin J. Murphy and Rick Ruback and Ross Watts and Kr. Y Weisbach and Especially Ben Hermahn},
title = {Outside directors and CEO turnover},
journal = {Journal of Financial Economics},
year = {1988},
pages = {431--460}
}
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Abstract
‘this paper examines the relation between the monitoring of CEOs by inside aud outside directors and CEO resignations. CEO resignations are predicted using stock returns and earnings changes as measures of prior performance. There is a stronger association between prior performance and the prhability of a resignation for companies with outsider-dominated boards than for companies with insider-dominated boards. This result dces not appear to be a function of ownership effects, size effects, or industry effects. Unexpected stock returns on days when resignations are announced are consistent with the view that directors increase firm value by removing bad management. Boards of directors are widely believed to play an important role in corporate governance, particularly in monitoring top manage4znt. Directors are supposed to supervise the actions of management, provide advice, and veto poor decisions. The board is the shareholders ’ first line of defense against incompetent management; in extreme cases, it wilt replace an errant chief executive officer (CEO). Discussing boards ’ effectiveness in this role, Jensen (1986) claims that ‘the internal control mechanism of corporations, which
Keyphrases
ceo turnover outside director prior performance ceo resignation earnings change important role outsider-dominated board extreme case bad management errant chief executive officer ownership effect size effect industry effect corporate governance stock return shareholder first line top manage4znt insider-dominated board firm value unexpected stock return veto poor decision incompetent management internal control mechanism
