Type of Document	Dissertation
Author	Jagannathan, Murali
URN	etd-183513359611541
Title	Internal Control Mechanisms and Forced CEO Turnover: An Empirical Investigation
Degree	PhD
Department	Finance
Advisory Committee	Advisor Name Title Diane K. Denis Committee Co-Chair Dilip K. Shome Committee Co-Chair Arthur J. Keown none John M. Pinkerton none Robert S. Hansen none
Keywords	corporate governance boards of directors ownership firm performance compensation
Date of Defense	1996-02-23
Availability	unrestricted
Abstract The dissertation empirically examines the efficacy of internal control mechanisms by analyzing 94 forced turnovers of chief executive officers (CEOs). It seeks to answer two primary questions: One, do governance-related characteristics influence the promptness with which poorly-performing CEOs are removed from office; and two, are removals of CEOs followed by changes in internal control mechanisms? The results suggest that poorly performing managers are removed more quickly in firms that have a larger percentage of independent outside directors on their board, that have higher equity ownership by the non-CEO directors and lower equity ownership by the CEO, and that separate the positions of CEO and chairperson. The results also suggest that the removal of the CEO provides both the opportunity and the incentive to alter internal governance systems. There is significant turnover of board members and the new boards generally have a higher fraction of independent outside directors and are more likely to separate the positions of CEO and chairperson. In addition, the sensitivity of CEO compensation to firm performance increases significantly following turnover. These post-turnover improvements in monitoring and incentive schemes are more significant in those firms that require a crisis in the product and/or capital market before they remove their CEOs. However, there is no evidence of short-term improvement in operating performance following changes in CEOs and governance systems. Overall, the results suggest that board and ownership characteristics do influence the effectiveness of internal monitoring systems and that CEO turnover is associated with broad changes in monitoring and incentive systems.
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