Explaining top management turnover in private corporations: The role of cross-country legal institutions and capital market forces

Abstract

We investigate private firms’ ability to identify and replace poorly performing managers across countries. We document three main findings. First, private firms are more likely to retain poorly performing managers in countries where legal institutions that protect minority investors are weak. Second, private firms are more likely to retain poorly performing managers than public firms only in countries where governance mechanisms inherent in public equity markets limit managerial entrenchment in public firms. Third, private firm managers are less likely to be replaced even when poor performance continues for relatively long horizons. Overall, our findings provide new evidence on the potential vulnerability of minority shareholders in private firms.

Résumé

Nous étudions la capacité des entreprises privées à identifier et à remplacer des dirigeants peu performants dans différents pays. Nous arrivons à trois principaux résultats. Premièrement, les entreprises privées sont plus susceptibles de conserver des dirigeants peu performants dans les pays où les institutions juridiques protégeant les investisseurs minoritaires sont faibles. Deuxièmement, les entreprises privées sont plus susceptibles que les entreprises publiques de conserver des dirigeants peu performants uniquement dans les pays où les mécanismes de gouvernance inhérents aux marchés boursiers publics limitent l’enracinement des dirigeants dans les entreprises publiques. Troisièmement, les dirigeants d’entreprises privées sont moins susceptibles d’être remplacés, même si de mauvais résultats se poursuivent sur un horizon relativement long. Globalement, nos conclusions fournissent de nouvelles preuves sur la vulnérabilité potentielle des actionnaires minoritaires dans les entreprises privées.

Resumen

Investigamos la capacidad de las empresas privadas para identificar y reemplazar a los gerentes con bajo desempeño a través de los países. Documentamos tres hallazgos principales. Primero, las empresas privadas son más propensas a retener a gerentes con bajo desempeño en países donde las instituciones legales que protegen a los inversionistas minoritarios son débiles. Segundo, las empresas privadas son más propensas a retener gerentes con un desempeño pobre que las empresas públicas solo en países donde los mecanismos de gobernanza inherentes a los mercados de capital público limitan el afianzamiento gerencial en las empresas públicas. En tercer lugar, los gerentes de firmas privadas son menos propensos a ser reemplazados incluso cuando el desempeño deficiente continúa por un horizonte relativamente largo. En general, nuestros hallazgos proporcionan nueva evidencia sobre la vulnerabilidad potencial de los accionistas minoritarios en empresas privadas.

Resumo

Investigamos a capacidade de empresas privadas de identificar e substituir gerentes com fraco desempenho nos países. Documentamos três principais descobertas. Primeiro, empresas privadas são mais propensas a manter gerentes com fraco desempenho em países onde instituições legais que protegem investidores minoritários são fracas. Segundo, empresas privadas são mais propensas a manter gerentes com fraco desempenho do que empresas públicas somente em países onde mecanismos de governança inerentes a mercados de capital público limitam o entrincheiramento gerencial em empresas públicas. Terceiro, gerentes de empresas privadas são menos propensos a serem substituídos mesmo quando o fraco desempenho continua por um horizonte relativamente longo. No geral, nossas descobertas fornecem novas evidências sobre a potencial vulnerabilidade de acionistas minoritários em empresas privadas.

摘要

我们调查私营公司识别和替换各国业绩不佳的经理人的能力。我们记录了三个主要发现。第一, 在保护少数股权投资者的法律制度薄弱的国家, 私营公司更有可能保留业绩不佳的经理人。第二, 只是仅仅在公共股票市场固有的治理机制限制公共公司管理防御的国家, 私人公司比公共公司更有可能保留业绩不佳的经理人。第三, 即使业绩在相对较长的时间内表现不佳, 私营公司经理人也不太可能被替换。总体而言, 我们的研究结果为私营企业中少数股权股东的潜在脆弱性提供了新的证据。

Appendix: Description of country-level indices

Index	Description
English origin	A dummy variable that takes the value of one for English law countries, and zero otherwise Source: La Porta et al. (1998)
Anti-self-dealing index	Average of ex-ante and ex-post private control of self-dealing Source: Djankov et al. (2008)
Legal	The average score across three variables presented below: (1) index of the judicial system’s efficiency; (2) index of the rule of law; and (3) the level of corruption Source: La Porta et al. (1998)
Corporate transparency index	Ranges from 0 to 6. One point for each of the following transparency measures:  (a) Annual financial statements must be audited by an external auditor  (b) Financial statements must contain explanatory notes  (c) Audit reports must be disclosed to the public  (d) A company must disclose ownership stakes representing 10%  (e) Board members’ other positions and directorships must be disclosed  (f) Managerial compensation must be disclosed on an individual basis Source: Chakra and Kaddoura (2015)
Anti-takeover provisions	Computed as the average of seven anti-takeover provisions Source: Nenova (2006)
Stock price synchronicity	Average R2 from market model regressions for each country Source: Jin and Myers (2006)