exploration paper

Posted to Supervision Science

manuscript MS-10-01142. R2

Governance and CEO proceeds:

Do something or do the proper thing? *

Ray Fisman

Columbia College or university, 823 Uris Hall, New york city NY 10027 [email protected] edu

Rakesh Khurana

Harvard University or college, Boston MOTHER 02163, [email protected] edu

Matthew Rhodes-Kropf

Harvard University, Boston MA 02163, [email protected] edu

Soojin Yim

Emory School, 1300 Clifton Road, The atlanta area, GA 30322, [email protected] edu

We study how corporate governance affects firm benefit through the decision of whether to fire or retain the CEO. We present a model in which weak governance - which usually prevents investors from manipulating the board -- protects poor CEOs coming from dismissal, and insulates the board coming from pressures by simply biased or perhaps uninformed investors. Whether more robust governance boosts retain/replace decisions depends on which will of these effects dominates. All of us use our theoretical framework to assess the effect of governance around the quality of firing and hiring decisions using info on the CEO dismissals of enormous U. T. corporations during 1994-2007. The findings will be most according to a beneficent effect of weak governance on CEO dismissal decisions, suggesting that insulation from shareholder pressure may enable better long-term decision-making.

1 )


From Adam Smith (1776) and Berle and Means (1932) to Hermalin and Weisbach (1998), economic analysts have portrayed concern regarding entrenched CEOs' ability to pursue personal gain at the expense of shareholders. The current belief is that firms risk value devastation by self-serving CEOs, if they are left unchecked simply by weak boards or weakened shareholders. As well, many companies possess actively chosen to weaken shareholders' powers while using explicit purpose of ensuring that long term profits will be maximized. Recently, Facebook, LinkedIn, and Groupon completed initial public offerings (IPOs) with dual course share structures—with * We all thank Ren´e Adams, Jones Chemmanur, Bruce Greenwald, Steve Kaplan, Bengt Holmstrom, Vinnay Nair, electronic

Andrew Metric, Tano Santos and Michael jordan Weisbach to get useful conversations. We likewise thank members at HBS, Sloan, UWO, Yale SOM, Berkeley Hass, Econometric Culture 2005 Globe Congress, Western Finance Connection, the SIFR conference upon Corporate Governance, and the 6th Maryland Finance Symposium. Every errors will be our own. one particular

Fisman ou al.: The actual right issue?

Article submitted to Managing Science; manuscript no . MS-10-01142. R2


super-voting shares retained by simply insiders. In Google's circumstance, the company introduced a new category of non-voting shares, stating, " outside the house pressures [from stockholders] all too often tempt businesses to sacrifice long term for you to meet quarterly market expectations. ”1 Google's concern about too much shareholders influence appears at odds with the classic notion that entrenchment—the padding of Entrepreneurs from shareholders—is bad for firms' performance. With this paper, we all incorporate both these views right into a theory of entrenchment that distinguishes between the ability of CEOs to manage the panel (the " CEO Protection” view) compared to board's capability to ignore shareholders (the " Board Protection” view). The literature about entrenchment generally ignores this kind of distinction, assuming that board dependence on the CEO and padding from investors have the same effect—protecting inferior Entrepreneurs. In our model, the CEO Protection and Board Safety views have got differing effects on the firm. Specifically, we examine the standard of the board's decision to keep or fire CEOs. All of us focus on this kind of decision as it one of the board's primary capabilities, one that is made solely by the board, and one that lies at the heart with the debate on the costs of board entrenchment. We officially present and empirically examine a model that establishes distinctive predictions pertaining to the CEO Protection and Board Protection views of entrenchment, and find data that restricting shareholder electric power over boards—that...

References: Adams, Renee M., Daniel Ferreira. 2007. A theory of friendly panels. Journal of Finance 62(1) 217–250.

Aghion, Philippe, David Van Reenen, Luigi Zingales. 2009. Advancement and institutional ownership. NBER

working newspaper (14769.

Almazan, Andres, Javier Suarez. 2003. Entrenchment and severance spend in optimal governance constructions.

Bebchuk, Lucian, Jesse Toast. 2004. Shell out Without Performance: The Unfulfilled Promise of Executive Settlement. Harvard School Press, Cambridge, MA.

Bebchuk, Lucian A., Alma Cohen. 2005. The expenses of created boards. Record of Financial Economics

78 409–433.

Bebchuk, Lucian A., Cabeza Cohen, Allen Ferrell. 2009. What matters in corporate governance? Review of

Economic Studies 22 783–827.

Berle, Alfred, Gardiner C. Means. 1932. The current Corporation and Private Property. MacMillan.

Bertrand, Marianne, Sendhil Mullainathan. 2001. Happen to be ceos paid for fortune? the ones without principals

will be

Bhagat, Sanjai, Bernard H. Black. 1999. The unclear relationship between board formula and firm


Brandenburger, Adam, Ben Polak. 1996. When managers cover all their posteriors: Producing the decisions the

industry wants to discover

Brick, I. E., U. Palmon, L. Wald. 06\. Ceo reimbursement, director settlement, and firm performance:

proof of cronyism? Record of Business Finance (12) 403423.

Brickley, James A. 2003. Scientific research on ceo turnover and firm-performance: A discussion. Record

of Accounting and Economics 36(1-3) 227–233.

Core, Steve, Wayne Demasiado, Tjomme Rusticus. 2006. Truly does weak governance cause poor stock returns? an

study of firm working performance and investors anticipations

Coughlan, Bea T., Ronald M. Schmidt. 1985. Exec compensation, managerial turnover, and firm

performance: an scientific investigation

Cremers, Martijn K. J., Vinay B. Nair. 2005. Governance mechanisms and equity prices. Journal of Finance

60(6) 2859–2894.

Danzon, Patricia, Claire Epstein, Esten Nicholson. 3 years ago. Mergers and acquisitions inside the pharmaceutical

and biotech companies

Denis, David J., Diane K. Bliktis. 1995. Overall performance changes following top managing dismissals. Diary

of Fund 50(4) 1029–1057.

Fama, Gene F., Michael C. Jensen. 1983. Splitting up of possession and control. Journal of Law and Economics

twenty seven 301–325.

Gillan, Stuart M., Jay Hartzell, Laura Big t. Starks. 3 years ago. Tradeoffs in corporate governance: Evidence by

board buildings and charter provisions

Gompers, Paul A., Joy M. Ishii, Toby Metrick. 2003. Corporate governance and fairness prices. Quarterly

Journal of Economics 118(1) 107–55.

Hermalin, Benjamin, Jordan S. Weisbach. 1998. Endogenously chosen panels of company directors and their monitoring of the ceo. American Monetary Review 88(1) 96–118.

Hermalin, Benjamin, Michael jordan S. Weisbach. 2003. Panels of directors as a great endogenously determined institution: a survey in the economic materials. Economic Coverage Review, Federal government Reserve Traditional bank of New You are able to


Holmstrom, Bengt. 99. Managerial motivation problems: A dynamic point of view. Review of Economical

Studies 66(1) 169–182.

Hotchkiss, Edith S i9000. 1995. Postbankruptcy performance and management yield. Journal of Finance 50


Huson, Mark R., Paul H. Malatesta, Robert Parrino. 2005. Managerial succession and firm performance.

Huson, Mark R., Robert Parrino, Laura Capital t. Starks. 2001. Internal monitoring mechanisms and ceo proceeds:

A long lasting perspective

Jenter, Dirk, Fadi Kanaan. 2008. Ceo proceeds and family member performance analysis. MIT Sloan School of

Management functioning paper.

Kadyrzhanova, Dalida, Matt Rhodes-Kropf. 2010. Concentrating on governance. Forthcoming Journal

of Financing.

Parrino, Robert. 1997. Ceo turnover and outside succession: A cross-sectional examination. Journal of economic

Economics 46 165–197.

Ross, Lee. 1977. The intuitive psychologist and his shortcomings, Improvements in trial and error social mindset,


Ross, Lee, Richard Nisbett. 1991. The Person and the Situation. McGraw Hill.

Warner, Jerold N., Ron Watts, Karen Wruck. 1988. Stock prices, celebration prediction and event research: An

study of top supervision changes

Weisbach, Michael H. 1988. Outside the house directors and ceo sequence. Journal of Financial Economics twenty 431–60.

Weisbach, Michael S. 1995. Ceo turnover plus the firm's investment decisions. Log of Financial Economics

37 159–188.