CEO turnover in public and private organizations: analysis of the relevance of different performance horizons

Abstract

PurposeThis paper investigates how past performance changes, prior CEO replacements and changes in the chairperson impact CEO turnover in public and large private businesses.Design/methodology/approachWe analyze 1,679 CEO replacements documented in a sample of 1,493 Spanish public and private firms during 1998–2004 by computing dynamic binary choice models that control for endogeneity in CEO turnovers.FindingsThe results reveal that different performance horizons (short- and long-term) explain the dissimilar rate of CEO turnover between public and private firms. Private firms exercise monitoring patience and path dependency characterizes the evaluation of CEOs, while public companies' short-termism leads to higher CEO turnover rates as a reaction to poor short-term economic results, and alternative controls—ownership and changes in the chairperson—improve the monitoring of management.Originality/valueOur results show the importance of controlling for path dependency to examine more accurately top executives' performance. The findings confirm that exposure to market controls affects the functioning of internal controls in evaluating CEOs and shows a short-term performance horizon that could be behind the recent moves of public firms going private or restraining shareholders' power.

Board characteristics and CEO turnover–performance relationship: evidence from India

“…Out of these, firm-year observations with missing data pertaining to the variables required for the present study were excluded (Arora and Bodhanwala, 2018), leading to 853 as the valid number of observations [2]. Finally, while performing regression analysis, the fixed effects model drops 607 observations because some of the sample firms (127 companies) do not have any CTURN event during the entire study period (Lafuente and Garcı ´a-Cestona, 2021;Drake et al, 2022). This resulted in an unbalanced data set of 246 firm-year observations (60 companies).…”

“…Any change taking place because of the death of the top executive is not considered a case of CTURN because it has no relationship with the performance of the managers (Kang and Shivdasani, 1995). However, other reasons for replacement, such as illness, regular successions or acceptance of another position within the firm, are considered as CTURN (Lafuente and Garcı ´a-Cestona, 2021). These cases are included based on the argument that the firms might try to disguise the actual reasons for CTURN (Kang and Shivdasani, 1995;Farrell and Whidbee, 2003), which might not reveal the true picture of the TPR in the Indian context.…”

“…In such a scenario, the adoption of cross-sectional binary models will render the regression estimates inefficient as well as biased (Wooldridge, 2002). Consequently, the logistic panel model will be appropriate for the present study (Lafuente and Garcı ´a-Cestona, 2021). Moreover, because the dependent variable takes only two values, the error term will also take two values.…”

“…Therefore, in such situations, the 2SYT-GMM technique can be used (Ghrab et al, 2022). Moreover, CTURN in the previous year can affect the chances of CTURN in the current year (Graffin et al, 2013), making it a dynamic process (Lafuente and Garcı ´a-Cestona, 2021). In dynamic models, the lagged dependent variable is included as an additional explanatory variable which makes the application of the 2SYT-GMM technique justified (Ghrab et al, 2022).…”

“…A good-quality corporate governance (CG) system should replace the CEO for poor performance (Gonz alez et al, 2014;Lafuente and Garcı ´a-Cestona, 2021). Empirical studies have also shown that there exists a significant negative relationship between CEO turnover (CTURN) and firm performance (FP) (Hazarika et al, 2012;Visintin et al, 2017;Ahmed and Hellerslia, 2019;Jenter and Lewellen, 2021).…”