Antecedent and consequence factors of CEO turnover in Indonesia

Abstract

This study aimed to test the usefulness of accounting information and market of the CEO turnover issues in Indonesia. The results of this study is planned for the long term to capture the overall factors that affect CEO turnover in Indonesia, not only from the accounting side but also from market side, so it can make a significant contribution for the company strategy to determine the corporate governance' setting. Previous research show inconclusive results about CEO turnover is whether the antecedent factors and consequences. Also, the issue of CEO turnover research is still very rarely done in Indonesia, since the turn of information not generally available. The sample used is all firms that are identified through the turn (either routine or nonroutine) in the company's top management level (in this case is President Director). The main advantage of this study is to use the sample all firms that conduct the CEO turnover period 1998-2005, and subsequently determine the accounting variables that allegedly able to explain these changes. For the companies that during the year observations is never do turnover action we define as a control sample. Final sample that we used for testing accounting data is as much as 140 companies, consisting of 81 companies that make the turnover and the 59 companies that did not. For the final sample testing of market data totaled 131 firms, consisting of 77 companies that make the turnover and the 54 companies that did not. Final sample for the second data source is set after considering the availability of data and the confounding effects during the observation period. Both of accounting data and market data are tested using logit models (separately), because the dependent variable used is a binary variable, 1 for turnover and 0 for others. The results of test show that accounting data (i.e. Total Asset, Total Sales, ROA, ROE and Earnings), statistically have a negative significant effect of turnover decisions while CurRatio and D/ Equity is not significant. The results of test for market data show the performance of stock prices statistically negative significant effect, while market risk have a statistically positive significant effect. This finding is consistent with previous research which states that in the CEO turnover decision making, the company will consider the performance of accounting and market performance achievements of the CEO. From the results of different test using paired samples t-test, we found the stock price rose significantly after the turn while the risk of being seen significant decreases. These findings reveal a positive response to the changing market. And finally, from the analysis of this study we conclude that the better performance of both (accounting and market) then there is a tendency for the incumbent CEO who will not be fired and the worse the performance of both the CEO who is appointed will have the potential to be replaced (down position or enter to the board of commissioners) and fired from the company as ultimatelly.

Chief Executive Officer/ Managing Director Succession and Value Relevance of Accounting Numbers

“…Financial performance, which is generally a benchmark of a managers' success in improving the welfare of the owners, is one of the essential considerations in top management turnover (Lindrianasari & Hartono 2012). This notion is supported by several studies (example: Huson, Malatesta & Parrino 2004;Lindrianasari & Hartono 2012;Murphy & Zimmerman 1993;Pourciau 1993) which demonstrate a significant relationship between financial performance and CEO/MD appointments.…”

“…For firms with poor financial performance, the replacement of CEO/ MD will send a positive signal to the market (Ishak & Abdul Latif 2012) as it may reflect the firm's intention to initiate strategic change (Shen & Cannella 2002). Therefore, the appointment is perceived as good news because new CEO/MD is expected to improve the firm's performance (Lindrianasari & Hartono 2012;Setiawan et al 2011;Rhim et al 2006).…”

“…Newly appointed CEO/MD is expected to improve firm performance with the implementation of new strategies and operation (Barron, Chulkov & Waddell 2011;Lindrianasari & Hartono 2012) and increase managerial productivity (Huson et al 2004). As general view propose, the improvement of firm's post succession performance is due to replacement of ineffective CEO with a new, more capable and competent CEO (Denis & Denis 1995;Ishak & Abdul Latif 2012).…”

“…R&D expenditures, capital expenditures & accounting accruals) influenced by CEO/MD succession as it is subjected to managerial consideration (Murphy & Zimmerman 1993). On the other hand, firm performance due to CEO/MD is commonly measured by performance indicators such as Tobin-Q, return on assets (ROA); return on shareholder's equity (ROE), total assets and total sales (Lindrianasari & Hartono 2012;Karaevli 2007;Rhim et al 2006;Shen & Cannella 2002). However, previous studies have shown mixed results regarding the impact of CEO successions on firms' subsequent performance (Ishak, Ku Ismail & Abdullah 2013;Karaevli 2007).…”

“…Therefore, it is understandably agreed that public, specifically investors, will react in certain ways when there are announcements of changes in the top management position since it indicates firms' future financial performance (Jalal & Prezas 2012), and their success or failure (Rhim, Peluchette & Song 2006). Financial performance, which is generally a benchmark of a managers' success in improving the welfare of the owners, is one of the essential considerations in top management turnover (Lindrianasari & Hartono 2012). This notion is supported by several studies (example: Huson, Malatesta & Parrino 2004;Lindrianasari & Hartono 2012;Murphy & Zimmerman 1993;Pourciau 1993) which demonstrate a significant relationship between financial performance and CEO/MD appointments.…”