Defond and Hung - Investor Protection and Corporate Governance Evidence From Worldwide CEO Turnover...

Journal of Accounting ResearchVol. 42 No. 2 May 2004

Printed in U.S.A.

Investor Protection and CorporateGovernance: Evidence fromWorldwide CEO Turnover

M A R K L . D E F O N D ∗ A N D M I N G Y I H U N G ∗

Received 9 January 2003; accepted 25 November 2003

ABSTRACT

Recent research asserts that an essential feature of good corporate gover-nance is strong investor protection, where investor protection is defined asthe extent of the laws that protect investors’ rights and the strength of thelegal institutions that facilitate law enforcement. The purpose of this study isto test this assertion by investigating whether these measures of investor pro-tection are associated with an important role of good corporate governance:identifying and terminating poorly performing CEOs. Our tests indicate thatstrong law enforcement institutions significantly improve the association betweenCEO turnover and poor performance, whereas extensive investor protection lawsdo not. In addition, we find that in countries with strong law enforcement,CEO turnover is more likely to be associated with poor stock returns whenstock prices are more informative. Finding that strong law enforcement in-stitutions are associated with improved CEO turnover-performance sensitivityis consistent with good corporate governance requiring law enforcement in-stitutions capable of protecting shareholders’ property rights (i.e., protectingshareholders from expropriation by insiders). Finding that investor protection

∗University of Southern California. The authors thank the following persons for their helpfulcomments: Fran Ayres, Ray Ball, Anne Beatty, Walt Blacconiere, Qiang Cheng, Richard Frankel,Rebecca Hann, Paul Healy, Steve Huddart, Bin Ke, S. P. Kothari, Richard Leftwich, Bob Lipe,Mical Matejka, Karl Muller, Kevin Murphy, Abbie Smith, Monica Stefanescu, and workshopparticipants at Hong Kong Polytechnic University, Indiana University, the Journal of AccountingResearch conference, Massachusetts Institute of Technology, Northwestern University, Universityof Oklahoma, the Penn State University, Temple University, University of Southern California,and University of Washington. We thank Mei Cheng for her capable research assistance.

269

Copyright C©, University of Chicago on behalf of the Institute of Professional Accounting, 2004

270 M. L. DEFOND AND M. HUNG

laws are not associated with improved CEO turnover-performance sensitivityis open to several explanations. For example, investor protection laws maynot be as important as strong law enforcement in fostering good governance,the set of laws we examine may not be the set that are most important inpromoting good governance, or measurement error in our surrogate forextensive investor protection laws may reduce the power of our test of thisvariable.

1. Introduction

Recent research finds that countries with better developed capital mar-kets have stronger investor protection (La Porta et al. [1997, 2000a]). Thisresearch argues that the association is because investor protection fostersgood corporate governance that in turn instills investor confidence. Becausean essential role of good corporate governance is to identify and terminatepoorly performing CEOs, one implication of this research is that firms incountries with strong investor protection are more likely to institute gov-ernance systems that successfully terminate poorly performing CEOs. Forexample, extensive investor protection laws give minority shareholders vot-ing rights that facilitate their ability to replace directors who fail to termi-nate unfit CEOs; and strong law enforcement curtails insider expropriation ofshareholder wealth (through mechanisms such as collusive self-dealing),which in turn reduces directors’ incentives to retain poorly performingCEOs. Therefore, we hypothesize that CEO turnover is more likely to beassociated with poor firm performance in countries with strong investorprotection, measured as extensive investor protection laws and strong lawenforcement institutions.1

We also predict that the metrics used to assess performance in CEOturnover decisions vary across countries as a function of how well the met-ric captures management performance. Specifically, in choosing betweenstock returns and earnings to measure CEO performance, we expect goodgovernance systems to rely most heavily on the metric that best capturesfirm performance. Because the information content of stock prices variesacross countries (Morck, Yeung, and Yu [2000]), we hypothesize that amongcountries with strong investor protection, CEO turnover is more likely tobe related to poor stock returns (as opposed to poor earning) in coun-tries where stock prices impound relatively more information about firmperformance.

We test our hypotheses on a sample of 21,483 firm-year observationsin 33 countries from 1997 through 2001. Descriptively, we find that theproportion of observations with CEO turnovers varies widely across coun-tries. For example, although 15% of the observations in our sample expe-rience CEO turnovers worldwide over the five years examined, 4% of the

1 For ease of exposition we use the term CEO to refer to the top executive officer, irrespectiveof the country, even though countries often use other titles (such as managing director) todescribe this position.

INVESTOR PROTECTION 271

observations in Portugal and 28% of the observations in South Korea replacetheir CEOs. This is consistent with a wide variation in CEO turnover.2

Consistent with prior CEO turnover research, we investigate our predic-tions using a logit model with CEO turnover as the binary dependent vari-able, and lagged stock returns and changes in earnings as independentvariables capturing firm performance (Murphy [1999]). We test our firsthypothesis by interacting our two performance measures with two metricsthat are used in prior research to capture the attributes of strong investorprotection: (1) extensive investor protection laws and (2) strong law enforce-ment institutions (La Porta et al. [2000a], Denis and McConnell [2003]).We measure the extent of a country’s investor protection laws using an in-dex that combines factors such as the extent of formal voting rules favoringminority shareholders and the ability of minority investors to make claimsagainst directors (La Porta et al. [1997], Hung [2001]). We measure stronglaw enforcement using an index that captures factors such as the extent ofgovernment corruption and the efficiency of the judiciary (La Porta et al.[1998], Leuz, Nanda, and Wysocki [2003]).

We find strong support for our first hypothesis when we measure investorprotection using law enforcement institutions, but little support when we mea-sure investor protection using extensive investor protection laws. Specifically,we find that CEO turnover is negatively associated with firm performancein countries with strong law enforcement and unrelated to performance incountries with weak law enforcement. In contrast, we find that the associ-ation between CEO turnover and performance is unrelated to whether acounty has extensive or limited investor protection laws. Finding that stronglaw enforcement institutions are associated with improved CEO turnover-performance sensitivity is consistent with increased property rights protec-tion facilitating good corporate governance. Finding that investor protec-tion laws have no association with CEO turnover-performance sensitivitymay be explained by several factors. For example: (1) extensive investorprotection laws may not be as effective as strong law enforcement in foster-ing good governance, (2) the set of investor protection laws we examinemay not be the set that are most critical in fostering good governance, or(3) measurement error in our surrogate for extensive investor protectionlaws may reduce the power of our test of this variable.

We test our second hypothesis by including an interactive dummy termfor high stock price informativeness in the regression used to test our firsthypothesis. We capture stock price informativeness using a stock returns syn-chronicity statistic that assesses how well a country’s stock prices reflect firmperformance (Morck, Yeung, and Yu [2000], Dyck and Zingales [2003]).In addition, because our first hypothesis test finds that extensive laws do

2 As in the prior CEO turnover literature, we do not distinguish routine from nonroutineturnovers, and we do not expect routine CEO turnovers to be related to firm performance(i.e., Warner, Watts, and Wruck [1988], Weisbach [1988], Murphy and Zimmerman [1993],Denis and Denis [1995], DeFond and Park [1999]).


not affect the association between CEO turnover and firm performance, weonly include the law enforcement measure to test our second hypothesis.These tests generally support our second hypothesis. Specifically, we findthat in countries with strong law enforcement and high stock price infor-mativeness, CEO turnover is negatively associated with firm performanceas captured by stock returns, but not with firm performance as capturedby earnings changes. Complementing these results, we also find that incountries with strong law enforcement and low stock price informativeness,CEO turnover is negatively associated with firm performance as captured byearnings changes, but not with performance as captured by stock returns.However, although our second hypothesis is robust to several sensitivity tests,we find that it is not robust to the use of an alternative measure of stock priceinformativeness.

In addition, we explore the effects of earnings informativeness by per-forming again our second hypothesis test after including an interactivedummy variable for tax-book conformity, where low tax-book conformitysurrogates for more informative accounting earnings (Hung [2001]). Thisanalysis finds that (among countries with strong law enforcement) CEOturnover is negatively related to stock price performance when prices aremore informative and negatively related to earnings when stock pricesare less informative and earnings are more informative. However, becausethe results of our second hypothesis are sensitive to our measure of stockprice informativeness, and because data restrictions significantly reduce oursample size for this test, these results should be interpreted with caution.

Finally, we find that our hypotheses continue to be supported after thefollowing sensitivity tests: including year dummies; controlling for cross-country variation in CEO turnover rates by including country dummies anddeleting countries with unusually high CEO turnover rates (≥20% overour sample period); controlling for potential cross-sectional correlation byapplying Fama-MacBeth (1973) statistics and a robust standard error esti-mation method that treats countries as clusters; controlling for the effects ofcapital market development, legal origin, and firm size; deleting countrieswith large numbers of observations and active takeover markets; excludingfirms with large blockholders; controlling for the effect of public opinionpressure on CEO-turnover sensitivity; eliminating loss firm-years; using an al-ternative partitioning of our law enforcement institutions measure; using analternative measure of law enforcement institutions; testing two alternativeexplanations of what our stock price informativeness measure may capture;using an alternative partitioning of our stock price informativeness measure;using an alternative surrogate for stock price informativeness; restricting thesample to industrial firms; including industry dummy variables; includingindustry-adjusted performance measures; and controlling for stakeholder-oriented countries.

Our findings contribute to the literature in several ways. First, our studyadds to La Porta et al. [1997, 2000a] by finding results that indicate stronglaw enforcement institutions are more important than extensive investor


protection laws in fostering a corporate governance environment capableof eliminating dysfunctional CEOs. Strong law enforcement environmentsmay be capable of unseating unfit CEOs despite limited investor protec-tion laws because all countries have company laws that grant investors aminimum level of protection against expropriation from insiders (La Portaet al. [1998]). As long as countries have strong institutions that enforce theselaws, and effectively curb insiders’ expropriation of minority shareholders’wealth, insiders are less likely to enjoy large private benefits through theiraffiliation with the corporation (Dyck and Zingales [2003]). Large privatebenefits accrue to insiders in countries with weak law enforcement becausethe insiders (including directors and CEOs) are more likely to engage incollusive behavior that expropriates minority shareholder wealth. Profitingfrom collusion with other insiders, including the CEO, reduces directors’incentives to dismiss poorly performing CEOs. In addition, because expro-priation of shareholder wealth is likely to impair firm performance, thedirectors themselves are likely to bear at least partial responsibility for firmsthat perform poorly. Thus, in countries with weak law enforcement, CEOturnover is less likely to be sensitive to poor performance.

Second, our results complement the recent international accountingresearch that finds that the institutions determining managers’ financialreporting incentives dominate countries’ formal accounting rules (Ball,Robin, and Wu [2003], Francis, Khurana, and Pereira [2003]). Consistentwith this research, our findings provide some evidence that countries’ le-gal enforcement institutions dominate the formal set of company laws thatgovern investor protection. Thus, the evidence suggests that both financialreporting and corporate governance behavior are more heavily influencedby country-level institutional factors than by formal rules.

Third, we add to a small but growing literature that examines CEOturnover outside of the United States. Although there is an extensive lit-erature on CEO turnover in the United States (Warner, Watts, and Wruck[1988], Weisbach [1988], Murphy and Zimmerman [1993], DeFond andPark [1999], Engel, Hayes, and Wang [2002]), studies examining this issueoutside of the United States are scarce and primarily focus on one countryor a small number of similar countries.3 This literature suggests that despitethe large differences in corporate governance mechanisms across countries,CEO turnover is generally associated with poor firm performance. We con-tribute to this literature by analyzing a large sample of countries with varyinginstitutional features, specifically by addressing whether investor protection(and its components) affect CEO turnover.

Fourth, we contribute to the literature by examining whether stock priceinformativeness affects the use of performance measures in CEO turnover

3 For example, see Kaplan [1994a] for German companies, Kaplan [1994b] and Kang andShivdasani [1995] for Japanese companies, Dahya, McConnell, and Travlos [2002] for U.K.companies, Volpin [2002] for Italian companies, and Gibson [2003] for the analysis of sevenemerging countries.


decisions (Morck, Yeung, and Yu [2000]). By doing so, we provide insightinto the relation between institutional factors and the role of market andaccounting information (Fan and Wong [2002], Lang, Lins, and Miller[2002], Young and Guenther [2003]). As Bushman and Smith [2001] pointout, there is little work exploring where earnings information has relativelymore or less importance than stock returns in explaining CEO turnover. Weaddress this issue and add to our understanding of the role of market and ac-counting information in corporate governance across different institutionalsettings.

Finally, our findings have implications for the recent and growing debateregarding the convergence of international corporate governance systemstoward a best-practices set of governance rules.4 One finding in this litera-ture is that although there is some evidence of convergence toward countriesadopting a common set of what are considered to be the best governancepractices, there is little evidence that these standards are actually being im-plemented (Khanna, Kogan, and Palepu [2002]). Complementing this lit-erature, our findings suggest that (at least with respect to the CEO-turnoverdecision), the specific governance rules per se may not be of primary impor-tance. Thus, a possible policy implication of our findings is that internationalregulators who wish to improve corporate governance may find it more ben-eficial to expend resources on strengthening law enforcement institutionsrather than on adopting additional laws.

We also acknowledge that our investigation is subject to several potentiallimitations. First, by using stock returns and earnings to assess CEO per-formance, we implicitly assume the objective function of our sample firmsis shareholder maximization. Stock returns and accounting earnings, how-ever, are likely to be inferior measures of CEO performance in stakeholder-oriented economies where firms’ objective functions explicitly includemaximizing the interests of constituents such as banks and labor unions.For example, labor unions are likely to evaluate CEOs using metrics thatcorrelate with high employment levels.

Although using returns and earnings to capture performance biasesagainst finding support for our hypotheses in stakeholder economies,we note that our hypotheses are supported in many of the stakeholdereconomies we analyze, such as Japan and Germany. Kaplan [1994a, b] andKang and Shivdasani [1995] also find that CEO turnover is associated withstock returns in Japan and Germany, suggesting that stock returns are eithercorrelated with performance measures that capture stakeholders’ interestsor that stakeholders also evaluate CEOs on stock price performance becausepoor returns can lead to other unfavorable outcomes (such as financial dis-tress) that harm stakeholders as well as shareholders. In addition, we reportsensitivity tests that find that our results are not explained by partitioning

4 For example, see Shleifer and Vishny [1997], DeJong et al. [2001], Hansmann andKraakman [2001], Liu [2001], Dahya and McConnell [2002], Dahya, McConnell, andTravlos [2002], and Khanna, Kogan, and Palepu [2002].


our sample on variables that measure the extent to which an economy isstakeholder oriented. However, because the variables in our analysis aremeasured with error, and because small sample sizes limit the power of ourtests, we cannot completely rule out the possibility that our results are atleast partially explained by countries that evaluate CEO performance usingmetrics other than stock returns and accounting earnings.

A second limitation of our study is that we cannot completely control forthe numerous environmental factors that are likely to affect the optimalCEO turnover-performance sensitivity in each country. These factors in-clude cross-country differences in the CEO’s ability to affect performance,the CEO’s risk aversion, and the extent to which stronger CEO turnover-performance sensitivities are likely to affect the CEO’s actions. For example,CEOs have limited ability to affect firm performance when the firm is a state-owned enterprise or a state-controlled bank, or when there is a high risk ofgovernment expropriation, corruption, or weak law enforcement. Similarly,firms are likely to use a variety of selection techniques to hire the optimalCEO, and routine CEO retirement ages are likely to vary across countries.

Although these (and other) country-specific variables may affect our anal-ysis, our sensitivity tests suggest that our findings are robust to many of thesefactors. For example, we find that our results hold after dropping firms withblockholders that have direct ownership greater than 20% (which excludesthe effects of state-owned enterprises); restricting our analysis to industrialfirms (which removes the effects of state-controlled banks); and includingvariables such as legal origin, stakeholder orientation, and country-specificdummies (which may be correlated with differences in CEO risk aversion,selection criteria, and routine retirement ages). However, because we areunable to rule out all cross-country differences that may influence our find-ings, we acknowledge that our results should be interpreted as suggestive(Bushman and Smith [2001]).

2. Hypotheses Development

2.1 INVESTOR PROTECTION AND CEO TURNOVER

Recent research argues that strong investor protection is the most impor-tant element in fostering capital markets with good corporate governance(La Porta et al. [1997, 1998, 2000a]), where corporate governance is de-fined as the set of mechanisms designed to protect minority shareholdersfrom expropriation by insiders (La Porta et al. [2000a]).5 These studies ar-gue that strong investor protection deters managers from opportunistic andinefficient behavior and thereby increases investors’ willingness to partici-pate in the capital markets (La Porta et al. [2000a]). For example, La Porta

5 However, acknowledging the importance of legal institutions that efficiently enforce con-tracts is not new to the literature. For example, the Coase [1960] theorem relies on the en-forceability of private contracts.


et al. [1997] find that both extensive investor protection laws and stronglaw enforcement institutions are associated with valuable capital markets,large numbers of listed securities per capita, and a high rate of initial publicoffering (IPO) activity. They conclude that this link between strong share-holder protection and well-developed capital markets is driven by stronginvestor protection’s creating an environment that fosters good corporategovernance. Because good corporate governance reduces the risk of man-agers expropriating shareholder wealth (through theft, shirking, or simplemismanagement), shareholders have greater confidence investing in suchmarkets.

However, the evidence in prior studies such as La Port et al. [1997] pro-vides only indirect evidence that shareholder protection encourages goodcorporate governance. Therefore, we examine a more direct characteristicof economies with good corporate governance: the propensity to eliminatepoorly performing CEOs. That is, if strong shareholder protection promotesgood corporate governance, we expect to observe outcomes that are consis-tent with good corporate governance in countries with strong shareholderprotection.

We examine CEO turnover because prior corporate governance researchemphasizes that a critical element of effective corporate governance mech-anisms is their ability to identify and terminate poorly performing exec-utives (Kaplan [1994b], Coffee [1999], Murphy [1999], Volpin [2002]).6

For example, Gibson [2003] asserts that a primary purpose of corporategovernance mechanisms is to ensure that poorly performing managers arereplaced, and Macey [1997] states that a necessary condition for effec-tive corporate governance systems is the elimination of poorly performingmanagers. The importance of replacing unfit CEOs is also consistent withShleifer and Vishny [1989, 1997], who speculate that the most importantform of managers’ expropriating shareholders’ wealth may be managersstaying on the job when they are no longer qualified, and with Jensen andRuback [1983], who argue that poorly performing managers who resist be-ing replaced might be the costliest manifestation of the agency problem.

Following the prior literature, we expect a greater tendency to shed poorlyperforming CEOs in countries with strong shareholder protection. In con-trast, we expect a greater propensity to retain poorly performing CEOs andterminate CEOs for reasons unrelated to performance in countries withweak shareholder protection. For example, the Straits Times recently re-ported that the CEO of a Thailand steel company “retired to make way forthe ‘new generation,’ who just happens to be the son of the parent com-pany’s CEO” (W. Thongrung, “Steel Industry: Win a Step Closer,” The Nation,

6 Volpin [2002] observes that the prior literature takes two empirical approaches to evaluat-ing the effectiveness of corporate governance. One is to test whether CEO turnover is associatedwith poor performance (Kaplan [1994a], Coffee [1999]), and the other is to analyze relativefirm value (Morck, Shleifer, and Vishny [1988], McConnell and Servaes [1990]).


May 29, 2002), suggesting that nepotism, rather than performance, explainsthis CEO turnover.

More specifically, we expect strong shareholder protection to facilitateidentifying and eliminating unfit CEOs in one or both of two ways. First,as suggested in La Porta et al. [1997], we expect extensive shareholderprotection laws to make it easier for minority shareholders to protest man-agement actions that destroy shareholder value. For example, La Porta et al.define shareholder protection laws (which they term anti-director rights) asincluding shareholders’ rights to call extraordinary shareholder meetingsand legal guarantees of a judicial venue for shareholders to challenge man-agement decisions—all mechanisms for protecting minority shareholders’rights. Although anecdotally we observe that minority shareholder voterturnout tends to be low, simply the potential for shareholders to oust di-rectors may provide an incentive for directors to act in the shareholders’interests. In addition, because extensive shareholder protection laws giveshareholders greater recourse in court, the threat of litigation may also in-duce directors to terminate poorly performing CEOs.

Second, we expect strong law enforcement institutions to facilitate removingincompetent CEOs by reducing the private benefits insiders receive becauseof their affiliation with the corporation (Dyck and Zingales [2003]).7 To un-derstand this causal relation, consider directors’ incentives in countries withweak law enforcement. A distinguishing feature of such countries is that themanagers and directors (collectively known as insiders) receive large per-sonal benefits from their controlling positions through various forms ofself-dealing, such as additional stock issuance to the insiders and sophisti-cated transfer pricing schemes (Shleifer and Vishny [1997]). For example,in some countries it is common for corporations to routinely sell assets toinsider-controlled companies at below-market prices and for corporationsto purchase assets from insider-controlled vendors at above-market prices.Thus, directors in these countries frequently profit from their affiliationwith the firm through activities that involve colluding with other insiders,including the CEO. Obviously, this reduces directors’ incentives to dismisspoorly performing CEOs. Furthermore, because self-dealing is not consis-tent with profit maximization, the directors themselves are likely to bearat least partial responsibility for firms with poor earnings and stock priceperformance. As a result, we expect that CEO turnover is less likely to besensitive to poor firm performance in countries with weak law enforcement.Consequently, our first hypothesis is (in alternative form):

H1: CEO turnover is more likely to be associated with poor firm per-formance in countries with stronger investor protection (i.e., thosewith extensive investor protection laws or strong law enforcement).

7 Dyck and Zingales [2003] refer to this as the “private benefits of control.”


Because La Porta et al. [1997] conclude that both extensive investor pro-tection laws and strong law enforcement institutions are important deter-minants of good corporate governance, we test our first hypothesis usingmeasures that individually capture each of these characteristics. In addi-tion, we design our tests to capture any potential interaction effects betweenour investor protection measures (Kothari [2000], Bhattacharya and Daouk[2002]).

2.2 INVESTOR PROTECTION, CEO TURNOVER,AND PERFORMANCE MEASURES

In countries where firms’ corporate governance mechanisms are capa-ble of terminating poorly performing CEOs, we also predict that the met-rics used to assess firm performance in CEO turnover decisions vary acrosscountries as a function of how well stock prices reflect firm performance.Multiple-performance-measure agency models predict that optimal con-tracts should rely more on performance metrics that are relatively moreprecise (Holmstrom and Milgrom [1991]). Although several prior stud-ies test this prediction in the context of executive compensation, few ex-amine this issue in the context of CEO turnover decisions (Engel, Hayes,and Wang [2002]). Furthermore, the U.S. and international evidence onthe relative importance of stock returns versus accounting earnings inexplaining CEO turnover is generally inconclusive (Bushman and Smith[2001]). For example, Weisbach [1988] finds that earnings changes aremore important than stock returns in explaining CEO turnover, whereasKaplan [1994b] finds that stock returns are more important than earningschanges.

Based on the implication of multiple-performance-measure agency mod-els, we predict that, among countries with strong investor protection, CEOturnover decisions are likely to rely more on stock returns when stock pricesare relatively more informative regarding firm performance. Recent re-search finds that stock prices in many countries provide little informationabout firm performance, suggesting that stock returns in many countries arenoisy measures of management performance (Morck, Yeung, and Yu [2000],Wurgler [2000]). Thus, we expect that in countries with governance mech-anisms capable of terminating poorly performing CEOs, companies are lesslikely to use stock returns to evaluate CEO performance if stock prices areless informative (Lambert and Larcker [1987]). Consequently, our secondhypothesis is (in alternative form):

H2: In countries with strong investor protection (i.e., those with gov-ernance mechanisms capable of terminating poorly performingCEOs), CEO turnover is more likely to be related to poor stockreturns when stock prices are relatively more informative.


3. Research Design

We test our first hypothesis—that CEO turnover is more likely to beassociated with poor firm performance in countries with strong investorprotection—by examining the effects of our investor protection measuresboth alone and in combination with each other, using logit models of thefollowing form:

Turnover = α0 + β1,n(Firm performance measures)

+ γ1,n(Investor protection measures)

+ δ1,n(Firm performance measures ∗ Investor protection measures) + ε.

(1)Following prior research, we measure CEO turnover as a binary dummy

variable and firm performance as lagged stock returns and lagged earn-ings changes (Weisbach [1988], Murphy and Zimmerman [1993], Volpin[2002]). As previously noted, we measure investor protection as the extentof a country’s investor protection laws and the strength of its law enforce-ment institutions. We measure the extent of a country’s investor protectionlaws using the anti-director rights index developed in La Porta et al. [1997].La Porta et al. construct the index based on a set of corporate governanceattributes that attempt to capture the essential elements of minority share-holder rights (American Bar Association [1989, 1993], Investor Responsi-bility Research Center [1994, 1995], Vishny [1994]). Specifically, the indexmeasures whether the country’s company law or commercial code explicitlyallows: (1) investors to vote by mail, (2) investors to keep control of theirshares during the annual shareholders’ meeting, (3) investors to vote fordirectors cumulatively, (4) investors to easily call an extraordinary share-holders’ meeting, and (5) minority investors a judicial venue to challengemanagement decisions. As in La Porta et al. [2000b], each item is coded 1or 0, with higher index values equal to more extensive investor protectionlaws, and we classify countries that fall above the median value of the indexas having extensive laws.

Following Leuz, Nanda, and Wysocki [2003], we measure the strengthof a country’s law enforcement institutions using the mean score of threelaw enforcement variables identified in La Porta et al. [1998]. The threevariables are based on assessments from risk rating agencies (Business In-ternational Corp. or International Country Risk) that attempt to capture:(1) the efficiency and integrity of the country’s judicial system; (2) the tra-dition of law and order in the country; and (3) the degree of governmentcorruption, indicating whether high-level officials are likely to demand spe-cial payments and whether low-level officials generally expect illegal pay-ments (in the form of bribes). The index ranges from 0 to 10, with higherscores representing stronger law enforcement institutions, and we classifycountries that fall above the median as having strong law enforcementinstitutions.


We test our second hypothesis with a measure used in the prior liter-ature to capture the extent to which stock prices are likely to impoundinformation about firm performance (as opposed to noise) (Morck, Yeung,and Yu [2000], Wurgler [2000], Dyck and Zingales [2003]). Specifically, weuse the index constructed by Morck, Yeung, and Yu [2000] that measuresthe propensity for stock prices in a country to move in the same direction—termed synchronicity. After testing several alternative explanations, Morck,Yeung, and Yu conclude that a primary factor explaining high stock pricesynchronicity in poor economies is the lack of informed traders in countrieswith poor property rights protection because risk arbitrageurs find it morecostly to keep their profits in such economies. They observe that this expla-nation is consistent with theoretical work by De Long et al. [1989, 1990], whoargue that stock markets dominated by noise traders are characterized bylarge synchronous price swings that are unrelated to economic fundamen-tals. Thus, Morck, Yeung, and Yu conclude that stock returns reflect moreinformation about firm performance when synchronicity is low and reflectless information about firm performance (and therefore are noisier) whensynchronicity is high. For purposes of our tests, we classify a country as hav-ing high stock price informativeness if its stock price synchronicity measureis lower than or equal to the median score among our sample countries.

4. Sample Selection and Descriptive Statistics

4.1 SAMPLE SELECTION

We obtain our data from Worldscope, a database that contains financialinformation and general profiles on publicly traded companies worldwide.Worldscope indicates that it prioritizes inclusion of companies with highmarket capitalization, and although coverage of primary stock markets inmany developed countries is nearly complete, it only includes U.S. firmsthat belong to the S&P 500 index (Leuz, Nanda, and Wysocki [2003]).Using the June edition of Worldscope CD-ROMs from 1996 to 2002, wecompile annual data on company officers and financial performance (stockreturns and changes in earnings) for the fiscal years 1997 to 2001. Ourinitial sample consists of countries with at least 100 companies in the lastyear of the Worldscope database and with necessary data to compute each ofthe country-level variables in our analysis. We exclude firm-year observationswith unidentifiable CEOs or with missing data on our financial performancevariables. In addition, we trim the top and bottom 1% of the sample withrespect to each performance variable. These restrictions result in a totalsample of 21,483 firm-year observations in 33 countries.

Because top executive titles vary both across countries and within coun-tries, we identify CEOs using the following procedures: First, we iden-tify whether companies have executives with the title chief executive officer,chief executive, or CEO.8 Second, for companies without officers with the

8 We exclude titles with deputy, vice, or assistant in them. For example, we exclude the titledeputy chief executive in identifying the top executive officer.


preceding titles, we search prior studies and the business press to identifythe most common title for CEOs in each country. Third, if we cannot findthe most common title for the CEO in a country from other data sources,we examine the title of each company’s officer listed in Worldscope andinfer the title of the top executive. We do not include the title chairmanbecause it is unclear whether the person with that title has managementpower, unless it is chairman, board of management for countries with a two-tierboard structure such as Austria, Germany, and the Netherlands (Gregoryand Simmelkjaer [2002]).9 Table 1 presents the titles used to identify CEOsin each of our sample countries based on the preceding procedure. For ex-ample, we identify the CEO as the person with the title chief executive officer,CEO, chief executive, or president for Japanese companies. We note that ourprocedure results in data omission for companies that do not use the titlesreported in table 1 for their CEOs. However, we do not expect this to biasour results.10

After identifying each company’s CEO, we classify a firm-year as a turnoveryear if the name of the CEO changes between successive fiscal years. Forexample, if the CEO in 1996 is Smith and the CEO in 1997 is Jones, we classify1997 as the turnover year.11 When there is a team of executives sharing thesame titles for CEO, we code a firm-year as a turnover year only if there isa change in the entire executive team (Volpin [2002]). Panel A of table 2discloses the number of observations in our sample and the number andproportion of observations with CEO turnover in each of the 33 countrieswe analyze.12 This panel shows that the proportion of CEO turnover ranges

9 For example, in Sweden, the chairman of the unitary board is a nonexecutive director bylaw (see Gregory and Simmelkjaer [2002, p. 58]).

10 It is possible that investor protection laws and law enforcement institutions are correlatedwith companies’ propensity to disclose the CEO’s identity and, hence, our ability to identifyCEO turnovers. To explore this possibility, we calculate the relative frequency of cases of missingCEO identity for each country in our analysis. We find that the correlation coefficients betweenthis variable and our variables capturing investor protection laws and law enforcement are−0.09 and −0.17, respectively. Thus, systematic failure to disclose the CEOs identity is notlikely to confound our analysis.

11 Given our large sample size, we generally compare the last name of the CEOs to reducethe cost of data collection. We pay special attention to differentiate names with suffix such as IIor Jr. In addition, we make an effort to resolve two issues regarding the Worldscope database.First, Worldscope is not consistent with the placement of family names for countries such asTaiwan and Korea, in which the sequence of first name and last name differs from the Westernconvention. For these countries, we manually check all turnover years in the sample to ensurethat we properly identify the family name. Second, there appear to be data errors caused by“unfamiliar” foreign names in countries such as Thailand and Japan. For these countries, wemanually check all turnover years in the final sample, and if the last names in two consecutiveyears differ just by one letter and the first names are the same, we treat both names as thesame.

12 Table 2 shows that there are fewer U.S. firms than Japanese and U.K. firms. This is becausethe Worldscope database includes only U.S. firms belonging to the S&P 500 index (Leuz,Nanda, and Wysocki [2003]). Thus, we report a sensitivity test excluding the U.S. firms in alater section.


T A B L E 1Title Used to Identify the CEO in Each Country, in Addition to Chief Executive Officer, Chief Executive,

and CEO a

Country Management Titleb

Australia Managing DirectorAustria Chairman, Board of ManagementBelgium Managing DirectorBrazil PresidentCanada NoneChile General ManagerDenmark Managing DirectorFinland Managing DirectorFrance NoneGermany Chairman, Board of ManagementGreece Managing DirectorHong Kong Managing DirectorIndia Managing DirectorIndonesia President DirectorItaly Managing DirectorJapan PresidentKorea PresidentMalaysia Managing DirectorMexico PresidentNetherlands Chairman, Board of ManagementNorway PresidentPakistan Managing DirectorPhilippines PresidentPortugal PresidentSingapore Managing DirectorSouth Africa Managing DirectorSpain Managing DirectorSweden Managing DirectorTaiwan PresidentThailand PresidentTurkey General ManagerUnited Kingdom Managing DirectorUnited States None

aWe exclude the titles with deputy, vice, or assistant in them. For example, we exclude titles such as deputychief executive and vice president in identifying the top executive officer.

bSource: Austria, Germany, and Netherlands (Gregory and Simmelkjaer [2002]); Brazil, Chile,India, and Korea (Gibson [2003]); Indonesia (National Committee on Good Corporate Governance[2000]); Japan (Kang and Shivdasani [1995]); United Kingdom (Hoover’s Handbook of World Business [1997]).

from 4% in Portugal to 28% in Korea, with the average being 15%.13 PanelB of table 2 reports the number and proportion of observations with CEOturnover in total and by year over the period we analyze. The panel indicatesthat the proportions of CEO turnover remain fairly constant across the years,ranging from 14% to 16%.

13 We note that the proportion of CEO turnovers in Brazil and Portugal is around 5%, muchlower than the average. Although we do not expect the mean proportion of CEO turnoverto affect the sensitivity of CEO turnover to firm performance, we repeat our analyses afterdropping firms in these two countries. We find that the results of our hypotheses tests areinvariant to excluding these two countries.


T A B L E 2Frequency of CEO Turnover in Each Country

Number of Number of CEO Proportion of CEOCountry Observations Turnovers Turnovers

Panel A: By countryAustralia 540 88 16%Austria 98 15 15%Belgium 174 21 12%Brazil 19 1 5%Canada 643 87 14%Chile 144 30 21%Denmark 288 46 16%Finland 163 17 10%France 624 75 12%Germany 398 75 19%Greece 135 19 14%Hong Kong 524 56 11%India 618 78 13%Indonesia 195 31 16%Italy 351 45 13%Japan 8,542 1,206 14%Korea 355 101 28%Malaysia 631 105 17%Mexico 106 11 10%Netherlands 148 25 17%Norway 82 14 17%Pakistan 121 28 23%Philippines 144 27 19%Portugal 27 1 4%Singapore 320 43 13%South Africa 299 49 16%Spain 179 26 15%Sweden 204 41 20%Taiwan 387 58 15%Thailand 229 28 12%Turkey 43 8 19%United Kingdom 2,962 480 16%United States 1,790 244 14%

Total 21,483 3,179 15%

Panel B: By year1997 5,472 771 14%1998 5,242 848 16%1999 5,286 739 14%2000 3,573 525 15%2001 1,910 296 15%

Total 21,483 3,179 15%

4.2 DATA AND DESCRIPTIVE STATISTICS

Panel A of table 3 reports the values of the country-level variables andthe mean, median, and standard deviation for each variable. This panelshows that, for example, the United Kingdom and United States have ex-tensive investor protection laws, strong law enforcement institutions (i.e.,


T A B L E 3Descriptive Statistics

Panel A: Data and descriptive statistics for country-level variables (N = 33 countries)

Investor Protection Law Enforcement Stock PriceCountry Laws Institutions Informativeness

Australia 4 9.5 61.4Austria 2 9.4 66.2Belgium 0 9.4 65.0Brazil 3 6.1 64.7Canada 4 9.8 58.3Chile 3 6.5 66.9Denmark 3 10.0 63.1Finland 2 10.0 68.9France 2 8.7 59.2Germany 1 9.1 61.1Greece 1 6.8 69.7Hong Kong 4 8.9 67.8India 2 5.6 69.5Indonesia 2 2.9 67.1Italy 0 7.1 66.6Japan 2 9.2 66.6Korea 1 5.6 70.3Malaysia 3 7.7 75.4Mexico 0 5.4 71.2Netherlands 2 10.0 64.7Norway 3 10.0 66.6Pakistan 4 3.7 66.1Philippines 4 3.5 68.8Portugal 2 7.2 61.2Singapore 3 8.9 69.7South Africa 4 6.4 67.2Spain 2 7.1 67.0Sweden 2 10.0 66.1Taiwan 3 7.4 76.3Thailand 3 4.9 67.4Turkey 2 4.8 74.4United Kingdom 4 9.2 63.1United States 5 9.5 57.9

Mean 2.48 7.58 66.53Standard deviation 1.28 2.15 4.43Q1 2.00 6.13 64.70Median 2.00 7.72 66.60Q3 3.00 9.44 68.90

higher than the median scores of the respective indexes), and high stockprice informativeness (i.e., lower than or equal to the median score of thecorresponding index), whereas Greece and Korea have limited investorprotection laws, weak law enforcement institutions, and low stock priceinformativeness.

Panel B of table 3 presents descriptive statistics for our two firm-level per-formance variables, partitioned on whether a CEO turnover occurs in the


T A B L E 3 — Continued

Panel B: Descriptive statistics for firm-level variables (N = 21,483 firm-years)

Standard t-test p-value,Variable N Mean Deviation Q1 Median Q3 Wilcoxon p-value

RET t −1Turnover 3,179 −0.063 0.375 −0.292 −0.100 0.102 <0.01No turnover 18,304 −0.032 0.368 −0.256 −0.068 0.133 <0.01

Et −1Turnover 3,179 0.001 0.065 −0.018 0.001 0.022 0.01No turnover 18,304 0.005 0.059 −0.013 0.002 0.022 <0.01

Investor protection laws is an index based on the extent of the laws that protect investors, as used inLa Porta et al. [1997]. This index ranges from 0 to 5 and aggregates the following components of investorrights: (1) ability to vote by mail, (2) ability to gain control of shares during the investors’ meeting, (3)possibility of cumulative voting for directors, (4) ease of calling an extraordinary investors meeting, and(5) availability of mechanisms allowing minority investors to make legal claims against the directors. Lawenforcement institutions is an index based on the mean score of three legal enforcement variables reported inLa Porta et al. [1998] and used in Leuz, Nanda, and Wysocki [2003]. The three variables are (1) efficiencyof the judicial system, which assesses the efficiency and integrity of the legal environment; (2) rule of law,which assesses the rule and order tradition in a country; and (3) corruption, which assesses the corruptionin government. The index ranges from 0 to 10, with higher scores for greater law enforcement. Stock priceinformativeness is percentage of stocks moving in step, from Morck, Yeung, and Yu [2000]. The index measuresthe extent that stock prices move in the same direction in a country, with higher scores for lower stock priceinformativeness. Turnover is a dummy variable equal to 1 if the name of the CEO changes in year t, and 0otherwise. RET t−1 is market-adjusted stock returns over the fiscal year before the top executive turnover. Themeasure equals a firm’s total investment returns minus the average total investment returns for all firms inthe country. Et−1 is change in earnings divided by beginning-of-year total assets over the fiscal year beforethe top executive turnover. Earnings are measured as earnings before interest and taxes (EBIT).

firm-year. We measure the two firm performance variables over the yearbefore the CEO change as follows: (1) market-adjusted returns (RET t−1)equal the total investment return minus the average total investment returnfor all firms in the country, and (2) the changes in earnings (Et−1) equalthe changes in earnings before interest and taxes (EBIT) scaled by total as-sets at the beginning of the year.14 The far right column in panel B presentsunivariate tests with p-values for t-tests and Wilcoxon two-sample tests com-paring the central tendencies of the firm-years with and without turnover.All differences across the groups are significant at p < 1% (two-tailed). Theresults suggest that, when compared with firm-years without CEO turnover,those with turnover have poorer returns and earnings before the departureof the CEO.

Table 4 presents Pearson correlation coefficients for the variables used inour analysis. Panel A reports the correlation among country-level variablesand reveals a positive association between strong law enforcement and highstock price informativeness. This is consistent with the idea that strong lawenforcement encourages informed arbitrage, which in turn causes prices tobetter reflect firm performance (Morck, Yeung, and Yu [2000]). Panel Breports the correlation among firm-specific variables. As expected, it

14 Following prior U.S. and international studies, we use EBIT to measure earnings becauseit prevents changes in capital structures or tax treatment from obscuring the performancemeasure (Weisbach [1988], Volpin [2002], Gibson [2003]).


T A B L E 4Pearson Correlation Coefficients

Panel A: Correlation coefficients among country-level variables (N = 33 countries)

Strong Law Enforcement High Stock PriceInstitutions Informativeness

Extensive investor protection laws 0.03 −0.03Two-tailed p-values 0.87 0.87

Strong law enforcement institutions 0.58Two-tailed p-values <0.01

Panel B: Correlation coefficients among firm-level variables (N = 21,483 firms-years)

Et−1 Turnover

RET t−1 0.24 −0.03Two-tailed p-values <0.01 <0.01

Et−1 −0.02Two-tailed p-values <0.01

Extensive investor protection laws is a dummy variable equal to 1 if a country’s investor protection lawsindex is above the median, and 0 otherwise. Strong law enforcement institutions is a dummy variable equal to1 if a country’s law enforcement institution index is above the median, and 0 otherwise. High stock priceinformativeness is a dummy variable equal to 0 if a country’s stock price informativeness index is above themedian, and 1 otherwise. See table 3 for other variable definitions.

shows a positive association between the two performance measures (stockreturns and the change in earnings) and a negative association betweenCEO turnover and the performance measures.

5. Hypotheses Tests

5.1 INVESTOR PROTECTION AND CEO TURNOVER

Table 5 presents a series of logistic regressions that test our first hypoth-esis. Panel A reports the coefficients from four logistic regression models,with the dependent variable equal to 1 for CEO turnover observations (and0 otherwise), and independent variables consisting of our two firm perfor-mance measures (RET t−1 and Et−1), interacted with various combinationsof our investor protection measures (extensive investor protection laws andstrong law enforcement institutions). Model 1 in panel A is a benchmarkregression of CEO turnover regressed on returns and earnings. This regres-sion is significant at p < 1% and indicates that CEO turnover is negativelyrelated to both of our performance measures (the coefficient on laggedstock returns is significant at p < 1%, two-tailed, and the coefficient onlagged change in earnings is significant at p < 10%, two-tailed). Thus, wefind that, on average, CEO turnover is negatively related to performanceacross our entire sample.

Models 2 through 4 are also significant at p < 1% and include termsthat interact firm performance with our investor protection measures. Theinteraction terms in these three regressions allow us to test whether the in-vestor protection measures are important in CEO-turnover decisions both


TA

BL

E5

Log

istic

Reg

ress

ion

ofC

EOTu

rnov

eron

Firm

Perf

orm

ance

Mea

sure

san

dIn

vest

orPr

otec

tion

Com

pone

nts

(N=

21,4

83O

bser

vatio

ns,I

nclu

ding

3,17

9w

ithC

EOTu

rnov

er)

Pan

elA

:Log

itre

gres

sion

for

the

enti

resa

mpl

e(d

epen

dent

vari

able

=Tu

rnov

er)

Mod

el1

Mod

el2

Mod

el3

Mod

el4

Two-

Taile

dTw

o-Ta

iled

Two-

Taile

dTw

o-Ta

iled

Coe

ff.

p-va

lues

Coe

ff.

p-va

lues

Coe

ff.

p-va

lues

Coe

ff.

p-va

lues

Inte

rcep

t0.

15<

0.01

−1.7

8<

0.01

−1.6

4<

0.01

−1.6

6<

0.01

Exte

nsiv

ela

ws

0.05

0.18

0.03

0.73

Stro

ngen

forc

emen

t−0

.15

<0.

01−0

.15

0.03

Exte

nsiv

ela

ws∗S

tron

gen

forc

emen

t0.

020.

87

RET

t−1

−0.0

3<

0.01

−0.2

10.

01−0

.05

0.62

0.05

0.74

E

t−1

−0.0

70.

08−0

.09

0.87

−1.0

50.

10−0

.71

0.46

RET

t−1

∗Ext

ensi

vela

ws

−0.0

20.

87−0

.19

0.35

RET

t−1

∗Str

ong

enfo

rcem

ent

−0.2

40.

05−0

.37

0.04

RET

t−1

∗Ext

ensi

vela

ws∗S

tron

gen

forc

emen

t0.

250.

30

E

t−1

∗Ext

ensi

vela

ws

−0.7

70.

26−0

.53

0.68

E

t−1

∗Str

ong

enfo

rcem

ent

0.65

0.38

0.87

0.46

E

t−1

∗Ext

ensi

vela

ws∗S

tron

gen

forc

emen

t−0

.33

0.83

Sign

ifica

nce

ofm

odel

,p-v

alue

0.01

0.01

0.01

0.01


TA

BL

E5

—C

ontin

ued

Pan

elB

:Coe

ffici

ents

from

pane

lApa

rtit

ione

dby

Inve

stor

prot

ectio

nla

ws

and

Law

enfo

rcem

enti

nstit

utio

ns

Law

Enfo

rcem

entI

nstit

utio

ns

Inve

stor

Prot

ectio

nL

aws

Vari

able

Wea

kSt

ron

gR

owTo

tals

(i)

(ii)

Lim

ited

RET

t−1

0.05

−0.3

2∗∗∗

−0.2

1∗∗∗

E

t−1

−0.7

10.

16−0

.09

(iii)

(iv)

Ext

ensi

veR

ETt−

1−0

.14

−0.2

6∗∗∗

−0.2

3∗∗∗

E

t−1

−1.2

4−0

.70

−0.8

6∗∗

Col

umn

tota

lsR

ETt−

1−0

.05

−0.2

9∗∗∗

−0.0

3∗∗∗

E

t−1

−1.0

5−0

.40

−0.0

7∗

Pan

elC

:Cou

ntri

esin

each

pane

lBpa

rtit

ion

Law

Enfo

rcem

entI

nstit

utio

ns

Inve

stor

Prot

ectio

nL

aws

Wea

kSt

ron

g

(i)

(ii)

Lim

ited

Gre

ece,

Indi

a,In

don

esia

,Ita

ly,K

orea

,Mex

ico,

Port

ugal

,A

ustr

ia,B

elgi

um,F

inla

nd,

Fran

ce,G

erm

any,

Japa

n,

Spai

n,T

urke

y(N

=2,

009)

Net

her

lan

ds,S

wed

en(N

=10

,351

)

Ext

ensi

ve(i

ii)(i

v)B

razi

l,C

hile

,Mal

aysi

a,Pa

kist

an,P

hili

ppin

es,S

outh

Afr

ica,

Aus

tral

ia,C

anad

a,D

enm

ark,

Hon

gK

ong,

Nor

way

,Ta

iwan

,Th

aila

nd

(N=

1,97

4)Si

nga

pore

,U.K

.,U

.S.(

N=

7,14

9)

See

tabl

es3

and

4fo

rva

riab

lede

fin

itio

ns.

∗∗∗ p

<1%

(tw

o-ta

iled)

;∗∗p

<5%

(tw

o-ta

iled)

;∗ p<

10%

(tw

o-ta

iled)

.


alone (models 2 and 3) and in combination with one another (model 4).15

However, to examine these relations we must first combine some of thecoefficients in panel A and test the significance of the aggregated coeffi-cients. Therefore, for ease of exposition, panel B reports the reconstructedcoefficients and the significance levels on RET t−1 and Et−1 (using Waldchi-square tests) in a two-by-two analysis. The columns of panel B partitionthe data by the strength of the law enforcement institutions and the rowspartition the data by the extent of the investor protection laws. The grandtotals (the intersection of the row and column totals) are constructed frommodel 1 of panel A, the row totals are constructed from model 2, the columntotals are constructed from model 3, and the individual cells (i) through (iv)are constructed from model 4.16 In addition, panel C lists the countries thatfall into each cell of panel B.

The reconstructed coefficients in panel B provide little support for ourhypothesis with respect to extensive investor protection laws but relativelystrong support for our hypothesis with respect to strong law enforcement in-stitutions. Specifically, the row totals show that the association between CEOturnover and our lagged performance measures is significant and negativein both rows. However, the differences between the coefficients on laggedreturns and lagged change in earnings across the two rows are not significantat conventional levels. In other words, the extent of investor protection lawsdoes not affect the association between CEO turnover and performance. Incontrast, the column totals show that the association between CEO turnoverand lagged returns is significant and negative only in countries with stronglaw enforcement institutions. Furthermore, the difference between the co-efficients on lagged returns across the two column totals is significant at p <

5% (two-tailed). Thus, unlike investor protection laws, the strength of lawenforcement institutions can discriminate between countries where CEOturnover is associated with poor returns and those where it is not.

An analysis of the individual cells in panel B also provides evidence thatstrong law enforcement countries drive the significant and negative asso-ciations between CEO turnover and lagged stock returns in the row totals.

15 We include the dummy variables for our investor protection measures so that the interceptis not constrained to be the same for all firms in the sample. We note that the coefficient on thestrong law enforcement institutions dummy is significant and negative in panel A of table 5.Although we argue that companies in countries with weak law enforcement are less likely toterminate poorly performing CEOs, these companies can have a higher CEO turnover rate forreasons unrelated to performance.

16 For example, the row total in panel B for lagged returns among firms with extensive in-vestor protection laws (−0.23) equals the sum of the following two coefficients from model 2 ofpanel A: the coefficient on lagged returns (−0.21) and the coefficient on lagged returns inter-acted with extensive investor protection laws (−0.02). Similarly, cell (iv) in panel B for laggedreturns (−0.26) equals the sum of the following four coefficients from model 4 of panel A: thecoefficient on lagged returns (0.05), the coefficient on lagged returns interacted with extensiveinvestor protection laws (−0.19), the coefficient on lagged returns interacted with strong lawenforcement institutions (−0.37), and the coefficient on lagged returns interacted with bothextensive investor protection laws and strong law enforcement institutions (0.25).


Specifically, CEO turnover is not significantly associated with lagged returnsin countries with weak law enforcement (cells (i) and (iii)), whereas CEOturnover is significantly and negatively associated with lagged returns incountries with strong law enforcement (cells (ii) and (iv)) at p < 1% (two-tailed).17 Thus, analyses of the individual cells in panel B find that CEOturnover is only related to poor stock returns in countries with strong lawenforcement institutions. In addition, though not reported in table 5, wefind that the lagged return coefficients in cells (i) and (ii) are significantlydifferent from one another at p < 1% (two-tailed), whereas the lagged re-turn coefficients in cells (iii) and (iv) are not significantly different fromone another at conventional levels. This means that although strong lawenforcement significantly improves the association between turnover andpoor returns, this improvement is concentrated among countries with lim-ited investor protection laws.

Panel C indicates that our results are consistent with prior studies thatfind an inverse relation between CEO turnover and firm performancein Japan, Germany, the United Kingdom, and the United States (Kaplan[1994a, 1994b], Kang and Shivdasani [1995], Dahya, McDonnell, andTravlos [2002]). That is, we find that Japan and Germany (in cell (ii)) and theUnited Kingdom and the United States (in cell (iv)) are in cells with a signifi-cant and negative association between CEO turnover and firm performance.In addition, the finding that CEO turnover is only negatively associated withstock returns (and not with the earnings changes) in countries with stronglaw enforcement suggests that, on average, corporate governance mecha-nisms tend to use stock returns to assess management performance acrossthe set of countries we examine. (We further investigate the choice of per-formance metric within the countries with strong shareholder protectionwhen we report the tests of our second hypothesis.)18

In summary, the results in table 5 suggest that strong law enforcement isthe dominant investor protection characteristic in achieving good corporategovernance with respect to identifying and terminating poorly performingCEOs. Although strong law enforcement institutions are most effective in

17 For each cell, we also test the hypothesis that the coefficients on stock returns and earningschanges both equal zero. The test result is insignificant at conventional levels for cells (i) and(iii) and significant at p < 1% for cells (ii) and (iv).

18 We also replicate the analysis in table 5 after individually including stock returns andearnings changes. Consistent with the results reported in table 5, this analysis finds that CEOturnover is negatively associated with stock returns in countries with strong law enforcementinstitutions (p < 1% for cells (ii) and (iv)), regardless of whether investor protection laws areextensive or limited. Unlike the results in table 5, we also find that CEO turnover is negativelyassociated with earnings changes in countries with extensive investor protection laws (p < 10%for cell (iii) and p < 5% for cell (iv)), regardless of whether law enforcement institutions arestrong or weak. However, because earnings and stock returns are positively correlated (see table4), the coefficients on earnings are likely to capture the relation between stock returns andCEO turnover. Thus, we draw our conclusions based on the analysis in table 5 that combinesboth earnings and returns in a single regression.


the presence of weak investor protection laws, there is little evidence that ex-tensive investor protection laws are effective in facilitating the CEO turnoverdecision. Good corporate governance may exist in the absence of extensivelaws because, as La Porta et al. [1998] indicate, all countries have companylaws that grant shareholders a minimum level of protection against expro-priation by insiders. As long as such laws are enforced, insiders are less likelyto engage in collusive behavior that expropriates shareholder wealth (Dyckand Zingales [2003]). In contrast, in countries with weak law enforcement,insiders (including directors and CEOs) are more likely to benefit fromcollusive behavior, thereby reducing directors’ incentives to dismiss unfitCEOs.

5.2 USE OF MARKET PRICES AND ACCOUNTING MEASURESIN CEO TURNOVER DECISIONS

Table 6 presents the results from testing our second hypothesis. Panel Areports the coefficients from four logistic regression models that essentiallyadd a measure of high stock price informativeness to the regressions usedto test our first hypothesis.19 Because our first hypothesis test finds thatextensive investor protection laws do not affect the association between CEOturnover and firm performance, we only use our law enforcement measureto test our second hypothesis.20 Panel B of table 6 presents a two-by-twoanalysis constructed from the coefficients in the regressions in panel A, withthe columns partitioning the data by the strength of the law enforcementinstitutions and the rows partitioning the data by the level of stock priceinformativeness. The grand totals (the intersection of the row and columntotals) in panel B are constructed from the coefficients in model 1, the rowtotals are constructed from model 2, the column totals are constructed frommodel 3, and the coefficients in cells (i) through (iv) are constructed frommodel 4. In addition, panel C lists the countries that fall into each cell ofpanel B.

Consistent with our second hypothesis, the row totals in panel B reportthat CEO turnover is significantly and negatively associated with lagged stockreturns in countries with high stock price informativeness (at p < 1%, two-tailed), but not in countries with low stock price informativeness. Comple-menting these results, the row totals also indicate that in countries withlow stock price informativeness, CEO turnover is significantly and nega-tively associated with the lagged change in earnings (at p < 1%, two-tailed).Also consistent with our prediction, the individual cells in panel B indicatethat the row total results are driven by firms in countries with strong lawenforcement institutions. That is, CEO turnover is only significantly associ-ated with lagged stock returns in countries with both strong law enforcement

19 Models 1 and 3 in table 6 are identical to models 1 and 3 in table 5 and are duplicatedhere for ease of exposition.

20 Sensitivity tests find that the association between poor performance and CEO turnoverdoes not differ among firms in countries with limited and extensive investor protection laws,irrespective of the informativeness of the stock market.


TA

BL

E6

Log

istic

Reg

ress

ion

ofC

EOTu

rnov

eron

Firm

Perf

orm

ance

Mea

sure

s,St

ock

Pric

eIn

form

ativ

enes

s,an

dSt

reng

thof

Leg

alIn

stitu

tions

(N=

21,4

83O

bser

vatio

ns,I

nclu

ding

3,17

9w

ithC

EOTu

rnov

er)

Pan

elA

:Log

itre

gres

sion

for

the

enti

resa

mpl

e(d

epen

dent

vari

able

=Tu

rnov

er)

Mod

el1

Mod

el2

Mod

el3

Mod

el4

Two-

Taile

dTw

o-Ta

iled

Two-

Taile

dTw

o-Ta

iled

Coe

ff.

p-va

lues

Coe

ff.

p-va

lues

Coe

ff.

p-va

lues

Coe

ff.

p-va

lues

Inte

rcep

t0.

15<

0.01

−1.7

1<

0.01

−1.6

4<

0.01

−1.6

2<

0.01

Hig

hst

ock

pric

ein

form

ativ

enes

s−0

.07

0.14

−0.1

40.

31St

rong

enfo

rcem

ent

−0.1

5<

0.01

−0.4

7<

0.01

Hig

hst

ock

pric

ein

form

ativ

enes

s∗S

tron

gen

forc

emen

t0.

450.

01

RET

t−1

−0.0

3<

0.01

−0.0

50.

59−0

.05

0.62

−0.0

80.

43

Et−

1−0

.07

0.08

−1.7

9<

0.01

−1.0

50.

10−0

.96

0.15

RET

t−1

∗Hig

hst

ock

pric

ein

form

ativ

enes

s−0

.24

0.04

0.34

0.31

RET

t−1

∗Str

ong

enfo

rcem

ent

−0.2

40.

050.

200.

46R

ETt−

1∗H

igh

stoc

kpr

ice

info

rmat

iven

ess∗S

tron

gen

forc

emen

t−0

.77

0.07

E

t−1

∗Hig

hst

ock

pric

ein

form

ativ

enes

s1.

720.

02−1

.17

0.64

E

t−1

∗Str

ong

enfo

rcem

ent

0.65

0.38

−5.4

3<

0.01

E

t−1

∗Hig

hst

ock

pric

ein

form

ativ

enes

s∗S

tron

gen

forc

emen

t7.

550.

01

Sign

ifica

nce

ofm

odel

,p-v

alue

0.01

0.01

0.01

0.01


Pan

elB

:Coe

ffici

ents

from

pane

lApa

rtit

ione

dby

Stoc

kpr

ice

info

rmat

iven

ess

and

Law

enfo

rcem

enti

nstit

utio

ns

Law

Enfo

rcem

entI

nstit

utio

ns

Stoc

kPr

ice

Info

rmat

iven

ess

Vari

able

Wea

kSt

ron

gR

owTo

tals

(i)

(ii)

Low

RET

t−1

−0.0

80.

11−0

.05

E

t−1

−0.9

6−6

.38∗

∗∗−1

.79∗

∗∗(i

ii)(i

v)H

igh

RET

t−1

0.26

−0.3

2∗∗∗

−0.2

9∗∗∗

E

t−1

−2.1

3−0

.00

−0.0

7

Col

umn

tota

lsR

ETt−

1−0

.05

−0.2

9∗∗∗

−0.0

3∗∗∗

E

t−1

−1.0

5−0

.40

−0.0

7∗

Pan

elC

:Cou

ntri

esin

each

pane

lBpa

rtit

ion

Law

Enfo

rcem

entI

nstit

utio

ns

Stoc

kPr

ice

Info

rmat

iven

ess

Wea

kSt

ron

g

(i)

(ii)

Low

Ch

ile,G

reec

e,In

dia,

Indo

nes

ia,K

orea

,Mal

aysi

a,M

exic

o,Fi

nla

nd,

Hon

gK

ong,

Sin

gapo

re(N

=1,

007)

Phili

ppin

es,S

outh

Afr

ica,

Spai

n,T

aiw

an,T

hai

lan

d,Tu

rkey

(N=

3,46

5)

Hig

h(i

ii)(i

v)B

razi

l,It

aly,

Paki

stan

,Por

tuga

l(N

=51

8)A

ustr

alia

,Aus

tria

,Bel

gium

,Can

ada,

Den

mar

k,Fr

ance

,G

erm

any,

Japa

n,N

orw

ay,S

wed

en,U

.K.,

U.S

.(N

=16

,493

)

See

tabl

es3

and

4fo

rva

riab

lede

fin

itio

ns.

∗∗∗ p

<1%

(tw

o-ta

iled)

;∗∗p

<5%

(tw

o-ta

iled)

;∗ p<

10%

(tw

o-ta

iled)

.


institutions and high stock price informativeness, and is only significantlyassociated with the lagged change in earnings in countries with both stronglaw enforcement institutions and low stock price informativeness.

In summary, consistent with our second hypothesis, the results in table 6find that in countries with strong investor protection, corporate governancemechanisms that are concerned with identifying poorly performing CEOsseem to evaluate CEO performance using stock returns when stock prices aremore informative, and using accounting earnings otherwise. Furthermore,countries with weak investor protection show no evidence of associatingCEO turnover with firm performance, irrespective of the level of stock priceinformativeness.

5.3 ADDITIONAL ANALYSIS OF MARKET PRICES AND ACCOUNTINGMEASURES IN CEO TURNOVER DECISIONS

In addition to stock price informativeness, earnings informativeness alsopotentially affects the performance metrics used in CEO turnover decisions.In particular, we speculate that when stock prices are less informative, firmsare more likely to use earnings to evaluate CEO performance. However,we note that one potential reason for low stock price informativeness isthat earnings are less informative (and hence it is more difficult for returnsto impound firm-specific information). Therefore, one reason for not sup-porting the preceding prediction is that low stock price informativeness iscorrelated with low earnings informativeness.

We explore the role of earnings informativeness by including a dummyvariable for high earnings informativeness in the regression testing our sec-ond hypothesis. We measure earnings informativeness using the tax-bookconformity index in Hung [2001], with low tax-book conformity indicatinghigh earnings informativeness. A large body of research documents thatearnings are less useful in countries with high tax-book conformity becausethe major goal of accounting systems in these countries is unlikely to bedecision usefulness (Ali and Hwang [2000], Hung [2001]). In addition,conformity in these countries provides managers with the incentives to re-port low earnings to reduce taxes (Joos and Lang [1994]). Because tax-bookconformity data on most countries with weak law enforcement institutionsare not available from prior studies (e.g., Alford et al. [1993], Hung [2001]),we restrict this analysis to countries with strong law enforcement.

Panel A of table 7 reports the results of four logistic regression modelsin which we replace strong law enforcement institutions with high earn-ings informativeness in the regression we use to test our second hypothesis.Similar to the analysis in tables 5 and 6, panel B reports the reconstructedcoefficients on stock returns and changes in earnings from the regressioncoefficients in panel A in a two-by-two analysis, with the columns partition-ing the sample by earnings informativeness and the rows partitioning thedata by stock price informativeness. Panel C lists the countries that fall intoeach cell of panel B.


TA

BL

E7

Log

istic

Reg

ress

ion

ofC

EOTu

rnov

eron

Firm

Perf

orm

ance

Mea

sure

s,St

ock

Pric

eIn

form

ativ

enes

s,an

dEa

rnin

gsIn

form

ativ

enes

sfo

rC

ount

ries

with

Stro

ngL

awEn

forc

emen

tIn

stitu

tions

(N=

17,5

00O

bser

vatio

ns,I

nclu

ding

2,53

3w

ithC

EOTu

rnov

er)a

Pan

elA

:Log

itre

gres

sion

for

the

enti

resa

mpl

e(d

epen

dent

vari

able

=Tu

rnov

er)

Mod

el1

Mod

el2

Mod

el3

Mod

el4

Two-

Taile

dTw

o-Ta

iled

Two-

Taile

dTw

o-Ta

iled

Coe

ff.

p-va

lues

Coe

ff.

p-va

lues

Coe

ff.

p-va

lues

Coe

ff.

p-va

lues

Inte

rcep

t−1

.79

<0.

01−2

.10

<0.

01−1

.81

<0.

01−2

.16

<0.

01

Hig

hst

ock

pric

ein

form

ativ

enes

s0.

32<

0.01

0.36

0.19

Hig

hea

rnin

gsin

form

ativ

enes

s0.

050.

230.

080.

79H

igh

stoc

kpr

ice

info

rm.∗

Hig

hea

rnin

gsin

form

.−0

.01

0.98

RET

t−1

−0.2

9<

0.01

0.11

0.65

−0.3

1<

0.01

−0.1

80.

78

Et−

1−0

.40

0.30

−6.3

8<

0.01

−0.1

70.

81−6

.36

0.26

RET

t−1

∗Hig

hst

ock

pric

ein

form

ativ

enes

s−0

.43

0.09

−0.1

40.

83R

ETt−

1∗H

igh

earn

ings

info

rmat

iven

ess

0.04

0.75

0.35

0.62

RET

t−1

∗Hig

hst

ock

pric

ein

form

.∗H

igh

earn

ings

info

rm.

−0.3

40.

63

E

t−1

∗Hig

hst

ock

pric

ein

form

ativ

enes

s6.

38<

0.01

6.33

0.26

E

t−1

∗Hig

hea

rnin

gsin

form

ativ

enes

s−0

.40

0.64

−0.0

21.

00

Et−

1∗H

igh

stoc

kpr

ice

info

rm.∗

Hig

hea

rnin

gsin

form

.−0

.05

0.99

Sign

ifica

nce

ofm

odel

,p-v

alue

0.01

0.01

0.01

0.01


TA

BL

E7

—C

ontin

ued

Pan

elB

:Coe

ffici

ents

from

pane

lApa

rtit

ione

dby

Stoc

kpr

ice

info

rmat

iven

ess

and

Ear

ning

sin

form

ativ

enes

s

Earn

ings

Info

rmat

iven

ess

Stoc

kPr

ice

Info

rmat

iven

ess

Low

Hig

hR

owTo

tals

(i)

(ii)

Low

RET

t−1

−0.1

80.

170.

11

Et−

1−6

.36

−6.3

8∗∗∗

−6.3

8∗∗∗

(iii)

(iv)

Hig

hR

ETt−

1−0

.32∗

∗∗0.

31∗∗

∗−0

.32∗

∗∗

Et−

1−0

.03

−0.1

00.

00

RET

t−1

−0.3

1∗∗∗

−0.2

7∗∗∗

−0.2

9∗∗∗

Col

umn

tota

ls

Et−

1−0

.17

−0.5

7−0

.40

Pan

elC

:Cou

ntri

esin

each

pane

lBpa

rtit

ion

Earn

ings

Info

rmat

iven

ess

Stoc

kPr

ice

Info

rmat

iven

ess

Low

Hig

h

(i)

(ii)

Low

Fin

lan

d(N

=16

3)H

ong

Kon

g,Si

nga

pore

(N=

844)

(iii)

(iv)

Hig

hB

elgi

um,F

ran

ce,G

erm

any,

Japa

n,S

wed

en(N

=9,

942)

Aus

tral

ia,A

ustr

ia,C

anad

a,D

enm

ark,

Net

her

lan

ds,

Nor

way

,U.K

.,U

.S.(

N=

6,55

1)

See

tabl

es3

and

4fo

rva

riab

lede

fin

itio

ns.

∗∗∗ p

<1%

(tw

o-ta

iled)

;∗∗p

<5%

(tw

o-ta

iled)

;∗ p<

10%

(tw

o-ta

iled)

.a E

arni

ngs

info

rmat

iven

ess

islo

wfo

rco

untr

ies

wit

ha

stro

ng

link

betw

een

tax

acco

unti

ng

and

fin

anci

alre

port

ing,

and

hig

hot

her

wis

e(H

ung

[200

1]).


The row totals in panel B report that the coefficient on lagged stock re-turns is significant and negative when stock price informativeness is highand that the coefficient on the lagged change in earnings is significant andnegative when stock price informativeness is low. The column totals indicatethat the coefficients on lagged stock returns are significant and negative, re-gardless of whether earnings informativeness is low or high. Examinationof the individual cells indicates that the coefficients on lagged stock returnsare always significant and negative when stock price informativeness is high(cells (iii) and (iv)) and that the coefficient on lagged earnings change is sig-nificant and negative when stock price informativeness is low and earningsinformativeness is high (cell (ii)). Thus, the results in panel B are consistentwith boards’ basing the turnover decision on stock prices whenever they areinformative and basing the turnover decision on earnings only when stockprice informativeness is low and earnings informativeness is high. We alsonote that, contrary to the concern expressed earlier, the presence of twocountries in cell (ii) indicates that some countries with low stock price in-formativeness also have high earnings informativeness, suggesting that lowstock price informativeness is not (completely) explained by low earningsinformativeness.

In addition, we acknowledge two caveats with respect to our analysis intable 7, panel B. First, our variables capturing both earnings and returnsinformativeness are measured with error, and second, data restrictions causethe samples in some of our panel B cells to become small. In particular,because cell (i) has only 163 observations from one country (Finland), thelack of significance in cell (i) may be due to reduced statistical power. Thus,inferences from the analysis in table 7 should be made with caution.

6. Robustness Tests

6.1 INCLUDING YEAR DUMMIES

To control for marketwide shocks over time, we repeat our analysis af-ter including year dummy variables. This analysis finds that the results ofour hypotheses tests as presented in tables 5 and 6 remain qualitatively un-changed.21 Thus, our hypotheses continue to be supported after includingyear dummy variables.

21 We define qualitatively unchanged with respect to table 5 to mean that in panel B oftable 5, we continue to find: (1) the coefficients on the performance measures in cells (i)and (iii) are not significantly different from zero, (2) the coefficients on lagged returns in cells(ii) and (iv) are significant and negative at p < 10% (two-tailed) and that the coefficients on thelagged change in earnings are not significantly different from zero, (3) the difference betweenthe row total coefficients on the performance measures is not significant at conventional levels,and (4) the difference between the column total coefficients on lagged returns is significant atp < 10% (two-tailed). Qualitatively unchanged with respect to table 6 means that in panel B oftable 6: (1) the coefficient on lagged earnings changes in cell (ii) is significant and negative atp < 10% (two-tailed), and (2) the coefficient on lagged stock returns in cell (iv) is significantand negative at p < 10% (two-tailed).


6.2 CONTROLLING FOR CROSS-COUNTRY VARIATION IN CEOTURNOVER RATES

The substantial cross-country variation in CEO turnover rates reportedin table 2 is consistent with large differences in voluntary CEO turnoverrates across countries. Although our inability to discern involuntary fromvoluntary CEO turnover is likely to simply reduce the power of our tests,it is also possible that voluntary turnovers are correlated with our variablesof interest, thereby biasing our results. To explore this latter possibility,we perform two additional analyses. First, to control for factors that mightexplain cross-sectional differences in CEO turnover across countries, suchas higher voluntary turnover, mandatory retirement rules, and CEO age, werepeat our analysis after including country dummy variables.22 This analysisfinds that the results of our hypotheses tests as presented in tables 5 and6 remain qualitatively unchanged, with one exception: the coefficient onearnings becomes significant and negative at p < 10% in cell (iv) of table 5.

Second, we sequentially drop the four countries with turnover rates thatare greater than or equal to 20% (Chile, Korea, Pakistan, and Sweden).This analysis finds that the results of our hypotheses tests as presented intables 5 and 6 remain qualitatively unchanged, with one exception: whenwe drop Chile, the difference between the column total coefficient on stockreturns becomes significant at p = .101 instead of p < 10% (two-tailed).Thus, although adding country dummies causes earnings changes to be-come negatively associated with CEO turnover in countries with extensiveinvestor protection laws and strong law enforcement institutions, and drop-ping Chile weakens the difference between countries with strong and weaklaw enforcement, the results are still consistent with our conclusion thatCEO turnover is negatively associated with firm performance in countrieswith strong law enforcement institutions.

6.3 CONTROLLING FOR POTENTIAL CROSS-SECTIONAL CORRELATION

A potential problem with pooling firms within years and countries is thatthe significance levels of the regression statistics may be overstated becauseof cross-sectional correlation among the error terms. To control for poten-tial cross-sectional correlation within years, we perform sensitivity tests thatexamine Fama-MacBeth statistics equal to the mean of the estimated coeffi-cients across the five regressions, divided by the standard error of the coef-ficients (Fama and MacBeth [1973]). Because the Fama-MacBeth statisticsare based on the coefficients from the annual regressions, they are unaf-fected by the potentially inflated t-statistics in the annual regressions. Thisanalysis finds that the results of our hypotheses tests as presented in tables 5and 6 remain qualitatively unchanged, with three exceptions: (1) the coeffi-cient on earnings becomes significant and negative at p < 10% in cell (iii) of

22 We drop the noninteractive terms on extensive investor protection laws, strong law enforce-ment institutions, and stock price informativeness to avoid collinearity between the countrydummy and country-level variables.


table 5; (2) the coefficient on earnings becomes significant and negative atp < 10% in cell (iv) of table 5; and (3) the coefficient on returns becomessignificant and positive at p < 10% in cell (iii) of table 6. A positive coefficienton our performance measures is consistent with CEO turnover increasingwith good performance (perhaps because successful CEOs are hired away byother firms) or with CEO turnover decreasing with poor performance (per-haps because the firm allows entrenchment of poorly performing CEOs).Thus, although earnings become negatively associated with CEO turnoverin countries with extensive investor protection laws and weak law enforce-ment institutions, the evidence from the row and column totals continuesto support our conclusion that CEO turnover is more likely to be negativelyassociated with firm performance in countries with strong law enforcementinstitutions.

To control for potential cross-sectional correlation within countries, we re-peat our hypotheses tests using the robust standard error estimates methodsuggested in Allison [1999], which corrects for this correlation by treatingeach country as a separate cluster. This analysis finds that the results ofour hypotheses tests as presented in tables 5 and 6 remain qualitatively un-changed, with one exception: the difference between the column total coef-ficients on lagged returns becomes significant at p = 11% (two-tailed). Thus,although the difference between the column totals weakens, the findingsstill generally continue to support our overall conclusions after adjustingfor potential correlation among firms in a country.23

6.4 CONTROLLING FOR DEVELOPMENT OF CAPITAL MARKETAND LEGAL ORIGIN

One concern for our study is that cross-country differences in CEOturnover might depend on factors found in prior research to differ acrosscountries, such as capital market development or legal origin. Thus, werepeat our analysis after including variables to capture these factors. Wemeasure capital market development as a country’s market capitalizationdivided by its gross national product (GNP) and a country’s legal originusing three dummy variables indicating French, German, and Scandinavianlegal origins (La Porta et al. [1997, 1998]).24 This analysis finds that theresults in tables 5 and 6 remain qualitatively unchanged. It also finds that,for the model 4 regression in table 5, the coefficient on capital market de-velopment is insignificant, the coefficient of the dummy variable indicatingGerman legal origin is significant and positive at p < 1% (two-tailed), andthe coefficient on the dummy variable indicating Scandinavian legal originis significant and positive at p < 5%. Furthermore, this analysis also findsthat, for the model 4 regression in table 6, the coefficient on the dummyvariable indicating Scandinavian legal origin is significant and positive at

23 We also note that because we use two-tailed t-tests, our p-values are conservatively stated.24 La Porta et al. [1997, 1998] classify countries into four legal origins: English, French,

German, and Scandinavian.


p < 5% and the other control variables are insignificant. Thus, althoughlegal origin helps explain CEO turnover across countries, our hypothesescontinue to be supported after controlling for capital market developmentand legal origin.

6.5 CONTROLLING FOR FIRM SIZE

To the extent that the frequency of CEO turnover might depend on firmsize, we repeat our analysis after including log(Assets in $USD) for each firm.We measure assets at the beginning of the year before the turnover year anduse exchange rates in the Worldscope database to convert the total assetsto U.S. dollars. This analysis finds that the results in tables 5 and 6 remainqualitatively unchanged and that the coefficient on firm size is significantand positive at p < 1% (two-tailed). Thus, although firm size helps explainCEO turnover across countries, our hypotheses continue to be supportedafter controlling for firm size.

6.6 DELETING JAPAN, THE UNITED KINGDOM, AND THE UNITED STATES

Table 2 reports that Japan, the United Kingdom, and the United Stateshave large numbers of observations compared to other countries. Thus, thelarge weight on these countries might drive the results in table 5. To addressthis concern, we repeat our analysis after sequentially excluding Japanese,U.K., and U.S. firms from our sample. This analysis finds that the resultsin tables 5 and 6 remain qualitatively unchanged, with one exception: thecoefficient on the lagged change in earnings in cell (iv) of table 5 becomessignificant and negative at p < 10% (two-tailed) after dropping the UnitedKingdom or the United States. Thus, although lagged earnings changes be-come significant and negative in countries with extensive investor protectionlaws and strong law enforcement institutions, our hypotheses continue to besupported after deleting Japanese, U.K., and U.S. firms from our analysis.

6.7 ALTERNATIVE CORPORATE GOVERNANCE MECHANISMS

In addition to investor protection, other corporate governance mecha-nisms include the external takeover market, concentrated ownership, andboard of director composition (Denis and McConnell [2003]). Becausethese other mechanisms are also expected to influence the association be-tween CEO turnover and performance, we consider whether they are likelyto affect our findings. With regard to the external takeover market, prior re-search finds that the United Kingdom and the United States tend to bethe only countries with active takeover markets. Therefore, as noted insection 6.6, we sequentially delete the United Kingdom and the UnitedStates from our sample and continue to find results that are qualitativelyunchanged. Thus, takeover activity does not appear to explain our findings.

Prior studies document that concentrated ownership is more prevalentin countries with weak investor protection (La Porta, Lopez-de-Silanes, andShleifer [1999]). Thus, it is possible that our finding in table 5 may result


from the presence of large blockholders. It is unclear, however, how largeblockholders are likely to affect the association between CEO turnover andfirm performance. On the one hand, large blockholders may provide bet-ter monitoring because they have more incentives to maximize firm valueand have more ability to influence management decision making (Shleiferand Vishny [1997]). On the other hand, large blockholders may have in-terests that conflict with shareholder value maximization and may colludewith management to pursue these interests (Gibson [2003]). For example,large shareholders may enjoy private benefits of control by exploiting busi-ness relationships with affiliated companies through transfer pricing (Volpin[2002]).

To explore whether our findings in table 5 result from the presence oflarge blockholders, we exclude observations with large shareholders thathave direct holdings greater than 20% of firm equity. We identify thesefirms using the ownership data from the June edition of the 1997–2000Worldscope CD-ROM.25 This analysis finds that the results of our first hy-pothesis test presented in table 5 remain qualitatively unchanged, with oneexception: the coefficient on stock returns becomes significant and positiveat p < 5% in cell (i). Thus, although stock returns become significant andpositive in countries with limited investor protection laws and weak law en-forcement institutions, our first hypothesis continues to be supported afterexcluding firms with large blockholders.

Finally, prior research finds evidence that independent board membersare more likely to dismiss CEOs (i.e., Weisbach [1988], Renneboog [2000],Suchard, Singh, and Barr [2001]). In our setting, this suggests that firmsmay use independent board members to either substitute for or complement astrong investor protection environment. Although lack of data prevents usfrom directly testing these possibilities, we believe they are unlikely to alterour conclusions. If firms use independent board members to substitute forthe lack of strong investor protection institutions, it would bias against ourfindings. That is, if independent board members are used to achieve goodcorporate governance outcomes in countries with weak investor protection,we would not expect to see the lack of association between CEO turnoverand performance in countries with weak law enforcement institutions.

On the other hand, we expect independent boards to complement stronginvestor protection because independent boards of directors are likely tobe a consequence of strong investor protection. This is because we expectstrong investor protection to lead to good corporate governance, whichshould in turn cause firms to choose more independent boards. That is, weview corporate governance factors such as board structure to be endogenouschoice variables, whereas the investor protection environment is exogenous.

25 We do not include the ownership data in the June 2001–2002 CD-ROM because the June2001 CD-ROM does not include ownership data and the June 2002 CD-ROM changes thedisclosure of these data. In addition, as in Gibson [2003], we do not trace through indirectownership chains because of lack of data.


Thus, although we are unable to control directly for the possible effects ofindependent board members in our analysis, we do not believe they arelikely to alter our conclusions.

6.8 EFFECT OF PUBLIC OPINION PRESSUREON TURNOVER-PERFORMANCE SENSITIVITY

Dyck and Zingales [2003] find evidence suggesting that public opinionpressure is an “extra legal” institutional factor that is at least as important infostering good corporate governance as strong investor protection. Specifi-cally, they find evidence that stronger public opinion pressure (as surrogatedby higher levels of newspaper diffusion among the population) reduces theprivate benefits of control to insiders. This finding is consistent with theidea that insiders’ reputation concerns limit their expropriation of investorwealth. Because countries with strong law enforcement institutions are alsolikely to have a large free press, we perform additional tests that control forthe effects of newspaper diffusion in the tests of our first hypothesis. Follow-ing Dyck and Zingales, we measure newspaper diffusion as daily newspapercirculation divided by the population. The intuition behind this measureis that the larger the free press, the greater is the likelihood the press willexpose insider expropriation to the public.

We obtain the data on newspaper diffusion as of 1996 from Dyck andZingales [2003] and the World Development Indicator (World Bank [2001]).We use 1995 data for Greece and Pakistan because their 1996 data are notreported, and we exclude India because it does not have such data available.We replicate the four regressions reported in table 5 after adding a variablefor newspaper diffusion and two interaction terms: the newspaper diffusionvariable times lagged stock returns, and the newspaper diffusion variabletimes the lagged change in earnings. This analysis finds that the results ofour hypotheses tests as reported in table 5 remain qualitatively unchanged.

Thus, as with our primary analysis in table 5, we continue to find littlesupport for our first hypothesis with respect to extensive investor protectionlaws, but relatively strong support for our hypothesis with respect to stronglaw enforcement institutions. One difficulty in making inferences fromthe analysis just described, however, is that further investigation finds thatthe model suffers from a multicollinearity problem, probably because thePearson correlation between strong law enforcement and newspaper dif-fusion is 0.68 (p < 1%).26 Nonetheless, the consistent association betweenCEO turnover and poor performance among the firms in countries with

26 We follow the procedure recommended in Allison [1999] to assess whether multicollinear-ity likely affects the coefficient estimates in our logit model. The results indicate that we donot have a multicollinearity problem with our independent variables in the model in table 5because all tolerance statistics exceed the suggested cutoff of 0.4. However, the results suggesta multicollinearity problem in the analysis that includes the newspaper diffusion variable. Forexample, the tolerance statistic is 0.13 for the interaction term between stock return and news-paper diffusion and 0.15 for the interaction term between accounting earnings and newspaperdiffusion.


strong law enforcement, and the consistent lack of such association amongthe firms in countries with weak law enforcement suggest that our findingsin table 5 are not likely to be driven by public opinion pressure.

6.9 DROPPING LOSS FIRMS

Prior studies document that CEO turnover is related to reported losses(Kang and Shivdasani [1995]). Because changes in earnings are less infor-mative for loss firms, this could explain why we do not find significance onthe change in earnings in some of our tests. Therefore, we test the sensitivityof our results to excluding loss-firm observations in our sample. This analy-sis indicates that the findings in tables 5 and 6 are qualitatively unchanged.Thus, our hypotheses continue to be supported after excluding loss-firmobservations.

6.10 ALTERNATIVE PARTITION OF LAW ENFORCEMENT INSTITUTIONS

Although prior studies frequently partition samples by medians ofcountry-level variables (e.g., La Porta et al. [2000b]), we repeat our analysisafter excluding countries whose values of the law enforcement institutionsvariable falls in the middle 20% of the cutoff.27 This analysis indicates thatthe findings in tables 5 and 6 remain qualitatively unchanged, with oneexception: the coefficient on earnings in cell (ii) of table 6 becomes in-significant. However, further investigation finds that cell (ii) of table 6 onlyincludes Finland. Because Finland is a country with high tax-book confor-mity, it is not surprising that reported earnings are not useful in monitoringmanagement performance. Thus, although earnings become insignificantin cell (ii) in table 6, both of our hypotheses continue to be supported usingthis alternative measure of law enforcement institutions.

6.11 ALTERNATIVE LAW ENFORCEMENT INSTITUTIONS MEASURE

Although the legal indexes constructed by La Porta et al. [1997, 1998]are widely used in prior studies, one concern for our analysis is that theseindexes, especially those related to law enforcement, might not be repre-sentative for our sample period. Specifically, La Porta et al. compile theefficiency of judicial system index based on 1980–1983 data and measurethe rule of law and corruption indexes based on 1982–1995 data. Althoughit is generally accepted that changing country-level institutions is a slowprocess (North [1990]), we test whether our results are sensitive to an al-ternative measure of law enforcement institutions based on more recentdata. We repeat our analysis after calculating the law enforcement institu-tion measure as the mean score of World Bank governance indicators on

27 We do not perform this sensitivity test on the investor protection laws variable becausethis variable only takes on a limited number of values. In addition, because the first quartileand median of this variable have the same value, it is reasonable to classify countries as havingextensive (limited) investor protection laws when the investor protection law index is above(equal to or below) the median.


rule of law and control of corruption, measured over 1997–1998 and 2000–2001 (Kaufmann, Kraay, and Zoido-Lobaton [2002]).28 Our analysis findsthat the results in tables 5 and 6 remain qualitatively unchanged. Thus, ourhypotheses continue to be supported using a measure of law enforcementinstitutions based on more recent data.

6.12 ADDITIONAL ANALYSIS OF STOCK PRICE INFORMATIVENESS

6.12.1. Alternative Explanations for Synchronicity Measure. Although Morck,Yeung, and Yu [2000] conclude that their synchronicity measure captureswhether stock prices are likely to reflect firm performance, we performadditional tests to rule out potential alternative explanations for what thisvariable may be capturing.

The first alternative explanation we test is whether the synchronicity mea-sure proxies for the homogeneity of firms within an economy, resultingfrom factors such as common risk exposure because firms in the economyare in related lines of business. Such homogeneity may result in a low vari-ation of market-adjusted stock returns across firms in economies with highsynchronicity, reducing the power of our tests and resulting in the lackof significance on the returns coefficients in cells (i) and (ii) in table 6,panel B. To explore this possibility we compare the standard deviation ofstock returns among the four cells in panel B to see whether the variation ofreturns in cells (i) and (ii) are unusually low. We find that the standard devia-tions in cells (i) and (ii) are 0.45 and 0.42, respectively, whereas the standarddeviations in cells (iii) and (iv) are 0.40 and 0.35, respectively. Thus, con-trary to our concerns, we find that the standard deviation of market-adjustedstock returns is actually higher among countries with high synchronicity (i.e.,low stock price informativeness) and therefore conclude that homogeneityacross firms in the highly synchronous countries is unlikely to drive ourfindings in table 6.

A second alternative explanation for the lack of significance on the re-turns coefficients in cells (i) and (ii) is that CEO performance might beevaluated based on raw returns. If so, measuring performance based onmarket-adjusted returns introduces measurement error. To address this con-cern, we perform our analysis again in table 6 using raw stock returns andfind the results qualitatively unchanged. Thus, it does not appear that ourconclusions based on the synchronicity measure in table 6 are driven bymeasurement error in our returns metric.

6.12.2. Alternative Partition of Stock Price Informativeness. We also investigatethe sensitivity of our stock price informativeness variable to our partitioningscheme by repeating the analysis in table 6 after excluding countries whosevalues of the stock price informativeness variables fall in the middle 20%.

28 We search various data sources but are unable to find more recent data on the efficiency ofthe judicial system variable. Thus, we do not include this variable in our new law enforcementinstitutions measure.


This analysis finds that the results in table 6 remain qualitatively unchanged.Thus, our second hypothesis continues to be supported using this alternativepartition of stock price informativeness.

6.12.3. Alternative Stock Price Informativeness Measures. We also repeat ouranalysis in table 6 after using two alternative measures of stock price in-formativeness. The first measure, following Roll [1988], is the adjusted R2

from regressing annual stock returns on market returns (i.e., the adjustedR2 from the market model). Specifically, we estimate the market model re-gression for each firm in our sample from 1997 through 2001 and take theaverage of the adjusted R2s for all firms in each country (where each firmis required to have at least three observations to remain in the analysis). Weclassify a country as having high stock price informativeness when its aver-age adjusted R2 is equal to or below the median of the sample countries.This analysis finds that the results in table 6 are qualitatively unchanged,with one exception: the coefficient on earnings is no longer significant atconventional levels in cell (ii) of panel B. Thus, although earnings are nolonger significant in countries with weak stock price informativeness, wecontinue to find support for our second hypothesis.29

Our second alternative measure of stock price informativeness is the mea-sure used in our primary analysis after being orthoganlized to the log of thenumber of listed stocks and the variables that Morck, Yeung, and Yu [2000]consider as alternative explanations for (or correlated with) the extent towhich stock prices move together.30 Specifically, this measure is computed asthe residuals from regressing the Morck, Yeung, and Yu synchronicity mea-sure on the log of the number of listed stocks, the comovement of returnon assets (ROA), industry and firm Herfindahl indexes, variance in grossdomestic product (GDP) growth, and log of geographical size (where thesevariables are measured as closely as possible to the measures used in Morck,Yeung, and Yu [2000]).31 This analysis finds that the results in table 6 arequalitatively unchanged, with two exceptions: (1) the coefficient on stockreturns in cell (ii) becomes significant and negative at p < 10% (two-tailed),and (2) although the magnitude of the negative coefficient on stock returnsin cell (iv) remains larger than the magnitude of the coefficient on stock

29 Recall that our second hypothesis predicts that returns are more likely to be used incountries with more informative stock prices but does not make a prediction regarding thecoefficient on earnings.

30 We control for the number of listed stocks because countries with fewer listed stocks will me-chanically have higher synchronicity because of the construction of the synchronicity measure(Morck, Yeung, and Yu [2000]).

31 The comovement of ROA is the average of the adjusted R2s from regressing ROA for eachfirm on the countries’ market ROA from 1997 through 2001, where each firm is required tohave at least three observations to remain in the analysis. The Herfindahl indexes are computedas in Morck, Yeung, and Yu [2000] using data from the 1996 Worldscope CD-ROM. GDP growthis based on 1990–1994 per capita GDP, and geographic size is based on 1994 square kilometers,where the data are obtained from the Worldbank World Development Index (WDI). Taiwan isdeleted from the analysis because it is not covered in the WDI database.


returns in cell (ii) (−0.32 in cell (iv) vs. −0.19 in cell (ii)), the differenceis not significant at conventional levels (p = 33%, two-tailed). Thus, oursecond hypothesis is not supported when we use this alternative stock priceinformativeness measure.

6.12.4. Summary of Additional Analyses of Stock Price Informativeness. In sum-mary, the additional analysis of the stock price informativeness measurefinds that our result is robust to two alternative explanations of what oursynchronicity measure captures, to an alternative partitioning of high andlow stock price informativeness, and to an alternative surrogate for stockprice informativeness. However, although most of our sensitivity tests findsupport for our second hypothesis, we find that our stock price informative-ness measure is not robust to one of our alternative surrogates for stock priceinformativeness. Thus, inferences from the tests of our second hypothesisshould be interpreted with caution.

6.13 CONTROLLING FOR INDUSTRY EFFECTS

One possible explanation for our findings is that industry concentrationdiffers across our sample partitions. For example, if the composition of theindustries in the column total for strong law enforcement countries differssignificantly from the composition of the industries in the column total forweak law enforcement countries, and CEO turnover-performance sensitivityvaries across industries, this could explain the significant difference acrossthe column totals. To evaluate this possibility, we examine the proportionof firms in each column and row total that fall into each of the 48 industrycategories defined in Fama and French [1997].32 Although not tabulated,this analysis finds that there does not appear to be any large industry cluster-ing in the columns or rows and that the industry distribution is comparableacross the partitions. Specifically, the maximum industry proportions in theleft and right columns and top and bottom rows in table 5, panel B are 7.3%,7.8%, 8.0%, and 6.1%, respectively. Furthermore, the largest difference inthe proportion of firms in a given industry between the two columns andtwo rows is 3.9% and 4.4%, respectively. Thus, we find that there is little ev-idence of large industry concentration in any of our partitions and that thedifferences in concentration across the partitions for any given industry arerelatively small. Consequently, differences in industry concentration acrosscountries are unlikely to explain our findings in table 5.

Despite the preceding findings, we also perform two additional tests thataddress the potential influence of industry differences on our findings. First,as in Hung [2001], we repeat our analysis after restricting our sample toindustrial firms (SIC codes 2000–3999 or 5000–5999). Second, we repeat

32 Fama and French [1997] form industries by combining four-digit Standard IndustrialClassification (SIC) codes that have similar operating characteristics. They argue that formingindustries based on mechanical combinations of two-digit (or three- or four-digit) SIC codesfails to capture the underlying similarities in operating characteristics across firms.


our tests after including industry dummy control variables. Both analysesfind that the results in tables 5 and 6 remain qualitatively unchanged. Thus,our hypotheses continue to be supported after restricting our analysis toindustrial firms and including industry dummies.

6.14 ALTERNATIVE PERFORMANCE MEASURES

Although our performance metrics are measured as in prior research, wealso perform tests to see whether our results are robust to using industry-adjusted performance measures. That is, we replace our lagged stock returnsand lagged change in earnings measures with measures that subtract themean industry lagged return and lagged change in earnings, respectively,where industry is defined as the 48 industry categories in Fama and French[1997]. The analyses from using industry-adjusted performance measuresto test our hypotheses find that our results in tables 5 and 6 remain qualita-tively unchanged. Thus, our findings are robust to using industry-adjustedperformance measures.

6.15 CONTROLLING FOR STAKEHOLDER-ORIENTED ECONOMIES

A potential alternative explanation for finding insignificant coefficientson returns and earnings in cells (i) and (iii) in table 5 is that our mea-sure of weak law enforcement captures countries in stakeholder-orientedeconomies. To test this alternative explanation, we repeat our analysis intable 5 after sequentially replacing our partition based on investor protec-tion laws with three different partitions based on whether the country isstakeholder oriented. This research design tests whether our results usingthe law enforcement partition are explained by whether the countries arestakeholder oriented.

One of our three alternative partitions captures whether the country iscreditor oriented, another captures the extent to which the country is labororiented, and the third is a general measure of stakeholder orientation. Thepartition on creditor orientation is the ratio of the total value of the externalequity markets to GNP (as used in La Porta et al. [1997]), where lowervalues of the ratio capture creditor-oriented countries.33 The partition onlabor orientation uses the labor power index in Dyck and Zingales [2003](which is derived from Pagano and Volpin [2000]), where higher valuesof the index capture labor-oriented countries.34 The general measure ofstakeholder orientation partitions the sample on whether the legal systemis based on code law or common law, where the code law partition capturesstakeholder-oriented countries (Ball, Kothari, and Robin [2000]).

33 We also use a ratio of the total value of the external equity markets divided by the total valueof debt in an attempt to capture a relative measure of stockholder versus creditor orientationand find qualitatively identical results.

34 A limitation of this analysis is that the labor power index is only available for 15 of the 33sample countries and that there are no observations in the cell for countries with labor-orientedeconomies and weak law enforcement.


This analysis finds that our results in table 5 remain qualitatively un-changed, with one exception: earnings are significant and negative atp < 10% in the cell for countries with weak law enforcement and com-mon law legal systems.35 Overall, we find that none of the three stakeholderorientation partitions is able to discriminate between countries where CEOturnover is sensitive to performance. Thus, our findings in table 5 do notappear to be explained by the correlation between our law enforcementpartition and stakeholder-oriented economies.

6.16 DICHOTOMOUS VERSUS CONTINOUS MEASURE OF SHAREHOLDERPROTECTION VARIABLES

Coding our continuous investor protection measures as dichotomousdummy variables is consistent with the prior corporate governance liter-ature on CEO turnover that examines the interaction variables of interest(such as board characteristics) and CEO turnover-performance sensitivity(e.g., Weisbach [1988], Kang and Shivdasani [1995], Denis, Denis, and Sarin[1997], Volpin [2002]). However, if the underlying relation between investorprotection and CEO turnover-performance sensitivity is actually linear, theuse of a dichotomous variable reduces the power of our tests. That is, if a con-tinuous measure of investor protection better captures the relation we areexamining, our tests are biased against finding support for our hypotheses.

Thus, we perform a sensitivity test that replaces our dummy variablesfor investor protection with continuous measures. This test finds that theinteraction terms using continuous measures are not significant at conven-tional levels. Finding a lack of significance with the continuous measures(along with finding significance when we use the dichotomous measures)is consistent with (but not conclusive of) the proposition that the dummyspecification is better at capturing the effect of investor protection on CEOturnover-performance sensitivity.36

A dummy specification of investor protection is likely to be appropriatefor our tests and superior to a continuous measure for the following reasons.First, if the continuous variable is measured with error, agglomerating thevariable into two categories can reduce the variability associated with themeasurement error. Thus, the resulting dichotomized variable can actuallycontain more information about the underlying construct being measured.In our setting, this is the case if the rankings for investor protection lawsand enforcement are measured with noise (which we expect them to be).Second, if the underlying variable has a threshold beyond which the effectoccurs, dichotomizing may better capture the variable’s effect. In our setting,this would be the case if the effect of investor protection laws or enforcement

35 We note that the difference between the coefficients on earnings across the countries withweak versus strong law enforcement remains insignificant, whereas the difference between thecoefficients on returns continues to be significant.

36 This is consistent with Denis, Denis, and Sarin [1997], who also report a sensitivity test thatfinds that a continuous measure of board independence does not support their hypothesis.


“jumps” at some point near the median. As reported in section 6.10, we alsoperform sensitivity tests after dropping 20% of the distribution surround-ing the median values of our investor protection law variable, and we findthat our results do not change. This finding is consistent with (though notconclusive of) the proposition that a threshold effect is somewhere near themedian. Third, Weisbach [1988] notes that a practical advantage for usingdummy variables in this literature is that it facilitates interpretation of thefindings by classifying firms into categories that correspond with those im-plied by the hypotheses. As in Weisbach, our hypotheses suggest classifyingfirms into categories (strong vs. weak investor protection), and without adichotomous classification it would be more difficult to interpret our find-ings. For example, it would be impossible to identify the implications of ourresults for specific countries as we currently do in panel B of table 5.

7. Summary

The purpose of our study is to investigate the effect of investor protectionon the association between CEO turnover and firm performance, and toexplore the metrics used to assess firm performance in the turnover deci-sion. We find that CEO turnover is negatively associated with firm perfor-mance in countries with strong law enforcement institutions and unrelatedto performance in countries with weak law enforcement. In contrast, we findthat the association between CEO turnover and performance is unrelatedto the extent of a country’s investor protection laws. Finding that stronglaw enforcement institutions are associated with improved CEO turnover-performance sensitivity is consistent with good corporate governance re-quiring law enforcement institutions capable of protecting shareholders’property rights (i.e., protecting shareholders from expropriation by insid-ers). Finding that investor protection laws are not associated with improvedCEO turnover-performance sensitivity is open to several explanations. Forexample, investor protection laws may not be as important as strong lawenforcement in fostering good governance, the set of laws we examine maynot be the set that is most important in promoting good governance, or oursurrogate for extensive laws may contain measurement error that reducesthe power of our test of this variable.

Finally, we find that CEO turnover is associated with poor stock returns incountries with strong law enforcement, but only when stock prices are moreinformative, suggesting that the characteristics of a country’s informationenvironment affect the relative usefulness of stock prices. However, becausethis last result is sensitive to our measure of stock price informativeness, itshould be interpreted with caution.

REFERENCES

ALFORD, A., J. JONES; R. LEFTWICH; AND M. ZMIJEWSKI. “Relative Informativeness of AccountingDisclosures in Different Countries.” Journal of Accounting Research 31 (Supplement 1993):183–223.


ALI, A., AND L. HWANG. “Country-Specific Factors Related to Financial Reporting and the ValueRelevance of Accounting Data.” Journal of Accounting Research 38 (2000): 1–22.

ALLISON, P. Logistic Regression Using the SAS System: Theory and Application. Cary, NC: SAS Institute,1999.

AMERICAN BAR ASSOCIATION. Multinational Commercial Insolvency. Chicago: American Bar Asso-ciation, 1989, 1993.

BALL, R.; S. P. KOTHARI; AND A. ROBIN. “The Effect of International Institutional Factorson Properties of Accounting Earnings.” Journal of Accounting and Economics 29 (2000): 1–51.

BALL, R.; A. ROBIN; AND J. S. WU. “Incentives Versus Standards: Properties of Accounting Incomein Four East Asian Countries. Journal of Accounting and Economics (2003): 235–70.

BHATTACHARYA, U., AND H. DAOUK. “The World Price of Insider Trading.” Journal of Finance 57(2002): 75–108.

BUSHMAN, R. M., AND A. J. SMITH. “Financial Accounting Information and Corporate Gover-nance.” Journal of Accounting and Economics 32 (2001): 237–333.

COASE, R. “The Problem of Social Cost.” Journal of Law and Economics 3 (1960): 1–44.COFFEE, J. “The Future as History: The Prospects for Global Convergence in Corporate Gover-

nance and Its Implications.” Northwestern University Law Review 93 (1999): 641–708.DAHYA, J., AND J. J. MCCONNELL. “Outside Directors and Corporate Board Decisions.” Working

paper, Purdue University, 2002.DAHYA, J.; J. J. MCCONNELL; AND N. TRAVLOS. “The Cadbury Committee, Corporate Perfor-

mance, and Top Management Turnover.” Journal of Finance 57 (2002): 461–83.DEFOND, M., AND C. PARK. “The Effect of Competition on CEO Turnover.” Journal of Accounting

and Economics 27 (1999): 35–56.DEJONG, A.; D. V. DEJONG; G. MERTENS; AND C. E. WASLEY. “The Role of Self-Regulation in

Corporate Governance: Evidence from the Netherlands.” Working paper, Simon School ofBusiness, 2001.

DE LONG, J. B.; A. SHLEIFER; L. H. SUMMERS; AND R. J. WALDMANN. “The Size and Incidence ofthe Losses from Noise Trading.” Journal of Finance 44 (1989): 681–96.

DE LONG, J. B.; A. SHLEIFER; L. H. SUMMERS; AND R. J. WALDMANN. “Noise Trader Risk inFinancial Markets.” Journal of Political Economy 98 (1990): 703–38.

DENIS, D., AND D. DENIS. “Performance Changes Following Top Management Dismissals.” Jour-nal of Finance 50 (1995): 1029–57.

DENIS, D. J.; D. K. DENIS; AND A. SARIN. “Ownership Structure and Top Executive Turnover.”Journal of Financial Economics 45 (1997): 193–221.

DENIS, D., AND J. J. MCCONNELL. “International Corporate Governance: A Survey.” Journal ofFinancial and Quantitative Analysis 38 (2003): 1–36.

DYCK, A., AND L. ZINGALES. “Private Benefits of Control: An International Comparison.” Journalof Finance (2003): Forthcoming.

ENGEL, E.; R. HAYES; AND X. WANG. “CEO Turnover and Properties of Accounting Information.”Working paper, University of Chicago, 2002.

FAMA, E. F., AND K. FRENCH. “Industry Costs of Equity.” Journal of Financial Economics 43 (1997):153–93.

FAMA, E. F., AND J. D. MACBETH. “Risk, Return, and Equilibrium: Empirical Tests.” Journal ofPolitical Economy 81 (1973): 607–36.

FAN, J., AND T. J. WONG. “Corporate Ownership Structure and the Informativeness of AccountingEarnings in East Asia.” Journal of Accounting and Economics 33 (2002): 401–25.

FRANCIS, J.; I. KHURANA; AND R. PEREIRA. “The Role of Accounting Auditing in CorporateGovernance and the Development of Financial Markets Around the World.” Asia-PacificJournal of Accounting & Economics (2003): Forthcoming.

GIBSON, M. “Is Corporate Governance Effective in Emerging Markets?” Journal of Financial andQuantitative Analysis 38 (2003): 231–50.

GREGORY, H., AND R. SIMMELKJAER. “Comparative Study of Corporate Governance Codes Rele-vant to the European Union and Its Member States: On Behalf of the European Commission,Internal Market Directorate General.” Weil, Gotshal & Manges LLP.


HANSMANN, H., AND R. KRAAKMAN. “The End of History for Corporate Law.” Georgetown LawJournal 89 (2001): 439–69.

HOLMSTROM, B., AND P. R. MILGROM. “Multi-Task Principal-Agent Analyses: Incentive Con-tracts, Asset Ownership and Job Design.” Journal of Law, Economics and Organization 7 (1991):524–52.

HUNG, M. “Accounting Standards and Value Relevance of Financial Statements: An Interna-tional Analysis.” Journal of Accounting and Economics 30 (2001): 401–20.

INVESTOR RESPONSIBILITY RESEARCH CENTER. Proxy Voting Guide. Washington, DC: Investor Re-sponsibility Research Center, 1994, 1995.

JENSEN, M., AND R. RUBACK. “The Market for Corporate Control: The Scientific Evidence.”Journal of Financial Economics 11 (1983): 5–50.

JOOS, P., AND M. LANG. “The Effects of Accounting Diversity: Evidence from the EuropeanUnion.” Journal of Accounting Research 32 (Supplement 1994): 141–68.

KANG, J., AND A. SHIVDASANI. “Firm Performance, Corporate Governance, and Top ExecutiveTurnover in Japan.” Journal of Financial Economics 38 (1995): 29–58.

KAPLAN, S. “Top Executives, Turnover, and Firm Performance in Germany.” Journal of Law,Economics and Organization 10 (1994a): 142–59.

KAPLAN, S. “Top Executive Rewards and Firm Performance: A Comparison of Japan and theUnited States.” Journal of Political Economy 102 (1994b): 510–46.

KAUFMANN, D.; A. KRAAY; AND P. ZOIDO-LOBATON. “Governance Matters II: Updated Indicatorsfor 2000/01.” World Bank Policy Research Department working paper 2772, 2002.

KHANNA, T.; J. KOGAN; AND K. PALEPU. “Globalization and Similarities in Corporate Governance:A Cross-Country Analysis.” Working paper, Harvard University, 2002.

KOTHARI, S. P. “The Role of Financial Reporting in Reducing Financial Risks in the Market,” inBuilding an Infrastructure for Financial Stability, edited by E. Rosengren and J. Jordan. Boston:Federal Reserve Bank of Boston, 2000: 89–102.

LAMBERT, R., AND D. LARCKER. “An Analysis of the Use of Accounting and Market Measures ofPerformance in Executive Compensation Contracts.” Journal of Accounting Research 25 (1987):85–129.

LANG, M.; K. LINS; AND D. MILLER. “Do Analysts Matter Most When Investors Are ProtectedLeast? International Evidence.” Working paper, University of North Carolina, University ofUtah, and Indiana University, 2002.

LA PORTA, R.; F. LOPEZ-DE-SILANES; AND A. SHLEIFER. “Corporate Ownership Around the World.”Journal of Finance 54 (1999): 471–518.

LA PORTA, R.; F. LOPEZ-DE-SILANES; A. SHLEIFER; AND R. W. VISHNY. “Legal Determinants ofExternal Finance.” Journal of Finance 52 (1997): 1131–50.

LA PORTA, R.; F. LOPEZ-DE-SILANES; A. SHLEIFER; AND R. W. VISHNY. “Law and Finance.” Journalof Political Economy 106 (1998): 1113–55.

LA PORTA, R.; F. LOPEZ-DE-SILANES; A. SHLEIFER; AND R. W. VISHNY. “Investor Protection andCorporate Governance.” Journal of Financial Economics 58 (2000a): 3–27.

LA PORTA, R.; F. LOPEZ-DE-SILANES; A. SHLEIFER; AND R. W. VISHNY. “Agency Problems andDividend Policies Around the World.” Journal of Finance 55 (2000b): 1–33.

LEUZ, C.; D. NANDA; AND P. WYSOCKI. “Earnings Management and Investor Protection: AnInternational Comparison.” Journal of Financial Economics 69 (2003): 505–27.

LIU, L. S. “Chinese Characteristics Compared: A Legal and Policy Perspective of CorporateFinance and Governance in Taiwan and China.” Working paper, Soochow University, 2001.

MACEY, J. “Institutional Investors and Corporate Monitoring: A Demand-Side Perspective.”Managerial and Decision Economics 18 (1997): 601–10.

MCCONNELL, J. J., AND H. SERVAES. “Additional Evidence on Equity Ownership and CorporateValue.” Journal of Financial Economics 25 (1990): 595–612.

MORCK, R.; A. SHLEIFER; AND R. W. VISHNY. “Management Ownership and Market Valuation:An Empirical Analysis.” Journal of Financial Economics 20 (1988): 293–315.

MORCK, R.; B. YEUNG; AND W. YU. “The Information Content of Stock Markets: Why Do Emerg-ing Markets Have Synchronous Stock Price Movement?” Journal of Financial Economics 58(2000): 215–60.


MURPHY, K. “Executive Compensation,” in Handbook of Labor Economics, Volume 3, edited by O.Ashenfelter and D. Card. Amsterdam: North Holland, 1999: 2485–563.

MURPHY, K., AND J. ZIMMERMAN. “Financial Performance Surrounding CEO Turnover.” Journalof Accounting and Economics 16 (1993): 273–316.

NORTH, D. Institutions, Institutional Change and Economic Performance. Cambridge, UK: Cam-bridge University Press, 1990.

PAGANO, M., AND P. VOLPIN. “The Political Economy of Corporate Governance.” Working paper,London Business School, 2000.

RENNEBOOG, L. “Ownership, Managerial Control and the Corporate Governance of CompaniesListed on the Brussels Stock Exchange.” Journal of Banking and Finance 24 (2000): 1959–95.

ROLL, R. “R2.” Journal of Finance 43 (1988): 541–66.SHLEIFER, A., AND R. VISHNY. “Management Entrenchment: The Case of Manager-Specific In-

vestment.” Journal of Financial Economics 25 (1989): 123–40.SHLEIFER, A., AND R. VISHNY. “A Survey of Corporate Governance.” Journal of Finance 52 (1997):

737–83.SUCHARD, J.; M. SINGH; AND R. BARR. “The Market Effects of CEO Turnover in Australian Firms.”

Pacific Basin Finance Journal 9 (2001): 1–27.VISHNY, P. Guide to International Commerce Law. New York: McGraw-Hill, 1994.VOLPIN, P. “Governance with Poor Investment Protection: Evidence from Top Executive

Turnover in Italy.” Journal of Financial Economics 64 (2002): 61–91.WARNER, J.; J. WATTS; AND K. WRUCK. “Stock Prices and Top Management Changes.” Journal of

Financial Economics 20 (1988): 461–92.WEISBACH, M. “Outside Directors and CEO Turnover.” Journal of Financial Economics 20 (1988):

431–60.WORLD BANK. World Development Indicator . Washington, DC: World Bank, 2001.WURGLER, J. “Financial Markets and the Allocation of Capital.” Journal of Financial Economics 58

(2000): 187–214.YOUNG, D., AND D. A. GUENTHER. “Financial Reporting Environments and International Capital

Mobility.” Journal of Accounting Research 41 (2003): 553–79.

Defond and Hung - Investor Protection and Corporate Governance Evidence From Worldwide CEO Turnover...

Documents

Transcript of Defond and Hung - Investor Protection and Corporate Governance Evidence From Worldwide CEO Turnover...