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The impact of changes in firm performance and risk on director turnover

The impact of changes in firm performance and risk on director turnover Purpose – The purpose of this paper is to show that director turnover varies in predictable and intuitive ways with director incentives. Design/methodology/approach – The paper uses a sample of 51,388 observations pertaining to 13,084 directors who served 1,065 firms during the period 1997‐2004. The data are obtained from RiskMetrics, Compustat, Execu‐Comp, CRSP, IBES, and the Corporate Library databases. Portfolio analysis, logit, and GLIMMIX regression analysis are used for the tests. Findings – The paper provides evidence that directors are more likely to leave when firm performance deteriorates and the firm becomes riskier. While turnover increasing as firm performance deteriorates is consistent with involuntary turnover, directors are also more likely to leave in advance of deteriorating performance. The latter is consistent with directors having inside information and acting on that information to protect their wealth and reputation. When inside and outside director turnover is contrasted, the association between turnover and performance is stronger for inside directors. Research limitations – Since data are obtained from multiple databases, the sample may be biased in favor of larger firms. The results may, therefore, not be applicable to smaller firms. To the extent that the story is unable to differentiate between voluntary and involuntary director turnover, the results should be interpreted with caution. Originality/value – Even though extant research has looked extensively at the determinants of CEO turnover, little has been written on director turnover. Director turnover is an important topic to study, since directors, especially outside directors, possess a significant oversight role in the corporation. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Review of Accounting and Finance Emerald Publishing

The impact of changes in firm performance and risk on director turnover

Sharad Asthana; Steven Balsam
Review of Accounting and Finance , Volume 9 (3): 20 – Aug 10, 2010
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Publisher
Emerald Publishing
Copyright
Copyright © 2010 Emerald Group Publishing Limited. All rights reserved.
ISSN
1475-7702
DOI
10.1108/14757701011068057
Publisher site
See Article on Publisher Site

Abstract

Purpose – The purpose of this paper is to show that director turnover varies in predictable and intuitive ways with director incentives. Design/methodology/approach – The paper uses a sample of 51,388 observations pertaining to 13,084 directors who served 1,065 firms during the period 1997‐2004. The data are obtained from RiskMetrics, Compustat, Execu‐Comp, CRSP, IBES, and the Corporate Library databases. Portfolio analysis, logit, and GLIMMIX regression analysis are used for the tests. Findings – The paper provides evidence that directors are more likely to leave when firm performance deteriorates and the firm becomes riskier. While turnover increasing as firm performance deteriorates is consistent with involuntary turnover, directors are also more likely to leave in advance of deteriorating performance. The latter is consistent with directors having inside information and acting on that information to protect their wealth and reputation. When inside and outside director turnover is contrasted, the association between turnover and performance is stronger for inside directors. Research limitations – Since data are obtained from multiple databases, the sample may be biased in favor of larger firms. The results may, therefore, not be applicable to smaller firms. To the extent that the story is unable to differentiate between voluntary and involuntary director turnover, the results should be interpreted with caution. Originality/value – Even though extant research has looked extensively at the determinants of CEO turnover, little has been written on director turnover. Director turnover is an important topic to study, since directors, especially outside directors, possess a significant oversight role in the corporation.

Journal

Review of Accounting and Finance – Emerald Publishing

Published: Aug 10, 2010

Keywords: Company performance; Risk analysis; Employee turnover; Directors

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