The market effects of CEO turnover in Australian firms
Jo-Ann Suchard a,) , Manohar Singh b, Robert Barr c
School of Banking and Finance, UniÕersity of New South Wales, New South Wales 2052, Australia b Long Island UniÕersity, New York, USA c Commonwealth Bank of Australia, Australia
Abstract We examine the relationship between the monitoring of CEOs by inside and outside directors and CEO turnover in the Australian market. Australian board structures and mechanisms are more similar to those in the USrUK but market activity characteristics are more similar to JapaneserGerman systems. The results suggest that there is a relationship between CEO turnover and lagged performance rather than current performance as found in the US. In addition, non-executive directors and independent directors are more likely to monitor management. However, there is a size effect as the results are driven by large firms. The difference in the results may be due to differences in the behaviour of United States and Australian institutional stockholders in solving corporate governance issues. Furthermore, a negative lagged market reaction is found on the announcement of the CEO change. However, the reaction is driven by a sub-sample of firms with non-independent boards and prior positive performance that may proxy for retirements. q 2001 Elsevier Science B.V. All rights reserved. JEL classification: G32 Keywords: Corporate governance; Australia; CEO change
Corresponding author. Tel.: q 61-2-98355876; fax: q 61-2-93856347. E-mail address: email@example.com ŽJ.-A. Suchard..
0927-538Xr01r$ - see front matter q 2001 Elsevier Science B.V. All rights reserved. PII: S 0 9 2 7 - 5 3 8 X Ž 0 0 . 0 0 0 3 2 - 9
J.-A. Suchard et al.r Pacific-Basin Finance Journal 9 (2001) 1–27
1. Introduction An efficient corporate governance system characterises a multiplicity of mechanisms to ensure that the interests of stockholders are protected against the agency behaviour of managers. One key mechanism of various corporate governance systems around the world, is the board of directors. It is argued that the major role of a typical board is the monitoring of managerial actions and thus the optimisation of corporate performance and maximisation of stockholder wealth. An important mechanism whereby boards discipline management, is the threat of removal or actual dismissal of poor performing management. Thus, by acting as monitors and as a disciplining mechanism, boards can significantly influence corporate policies and in case of failure, take corrective action by the removal of inefficient management. Prior studies have examined the relationship between the monitoring role of boards and poor performance related CEO turnover in the United States ŽUS., Japan, Germany and the United Kingdom ŽUK.. Although, it is commonly reported that poor corporate performance is associated with CEO turnover, there are significant differences among these countries in terms of the sensitivity of CEO turnover to performance, as well as, the time lag between poor performance and removal of the CEO. In addition, there are significant differences as to the influence that various board characteristics may have on the performance–turnover relationship. In the US and the UK, poor performance seems significantly related to CEO removal. The US and the UK tend to have similar board structures and governance practices, as well as similar market transparency and depth. In contrast, the poor performance–CEO Žpresident. turnover relationship is not very strong for German ŽJapanese. systems of governance. However, the explanation of the reported asymmetry is not clear. The logical question that arises is whether it is differential board structures and governance mechanisms or the differences in the market’s objectivity in evaluating corporate performance, that explains the turnover –...