Board restructure, CEO succession and financial performance in financially distressed firms.ABSTRACT This study focuses on the relation between post-CEO-succession financial performance and board restructure in financially distressed firms. The empirical em·pir·i·cal adj. 1. Relying on or derived from observation or experiment. 2. Verifiable or provable by means of observation or experiment. 3. results in this study show a negative relation between the change in board size and post-CEO-succession operational performance in the CEO (1) (Chief Executive Officer) The highest individual in command of an organization. Typically the president of the company, the CEO reports to the Chairman of the Board. succession year, which is consistent with the view that smaller boards are more effective overseers of the CEO than larger boards. My results also report a positive relation between the change in board composition and post-CEO-succession operational performance in the CEO succession year. * I am grateful to Wallace Wal·lace , Alfred Russel 1823-1913. British naturalist who developed a concept of evolution that paralleled the work of Charles Darwin. Davidson Da·vid·son , Jo(seph) 1883-1952. American sculptor best remembered for his vigorous portrait busts of Woodrow Wilson, Franklin D. Roosevelt, and Albert Einstein, among others. for his valuable guidance, encouragement and kindness Kindness See also Generosity. Allworthy, Squire Tom Jones’s goodhearted foster father. [Br. Lit. . I also thank Bhavesh Bhavesh is an uncommon given Indian male name, originating in the South Asian country of India. The name is a derivation or an alternate name of Lord Shiva. It also means 'King of the world' or 'Lord of the world' [1] and supposedly also originates from the Sanskrit word Patel and other anonymous reviewers for their useful suggestions and comments. Keywords Keywords are the words that are used to reveal the internal structure of an author's reasoning. While they are used primarily for rhetoric, they are also used in a strictly grammatical sense for structural composition, reasoning, and comprehension. : Board Restructure, CEO Succession, Financial Performance 1. INTRODUCTION Today, more than half of American American, river, 30 mi (48 km) long, rising in N central Calif. in the Sierra Nevada and flowing SW into the Sacramento River at Sacramento. The discovery of gold at Sutter's Mill (see Sutter, John Augustus) along the river in 1848 led to the California gold rush of households are investing in publicly traded corporations directly or indirectly, which makes the Chief Executive Officer (CEO) of these companies more visible than ever before. As the shareholders and boards of directors increase their expectations of CEO performance standards, the incidence of CEO succession is accelerating in the U.S. and globally. Shareholder activism and changes in corporate governance Corporate Governance The relationship between all the stakeholders in a company. This includes the shareholders, directors, and management of a company, as defined by the corporate charter, bylaws, formal policy, and rule of law. have transformed the CEO's world (Lucier Lucier is a surname, and may refer to:
spiegel iron, spiegeleisen pig iron - crude iron tapped from a blast furnace and Schuyt, 2002). The rise and the fall of these powerful CEOs are "the new normal phenomena," according to according to prep. 1. As stated or indicated by; on the authority of: according to historians. 2. In keeping with: according to instructions. 3. a 2002 survey on 2500 largest publicly traded corporations conducted by Booz Allen Hamilton Booz Allen Hamilton, Inc., referred to as Booz Allen is one of the oldest strategy consulting firms in the world.[1] The firm formerly had two consulting divisions: WCB (Worldwide Commercial Business, also known as “The Commercial Side”) and WTB , a well-known well-known adj. 1. Widely known; familiar or famous: a well-known performer. 2. Fully known: well-known facts. consulting firm Noun 1. consulting firm - a firm of experts providing professional advice to an organization for a fee consulting company business firm, firm, house - the members of a business organization that owns or operates one or more establishments; "he worked for a . The report demonstrates that the succession rate of CEOs at major corporations increased by 53% between 1995 and 2001. During the same period, the number of CEOs departing de·part v. de·part·ed, de·part·ing, de·parts v.intr. 1. To go away; leave. 2. To die. 3. because of their company's poor financial performance increased by 130%. In the academic world, researchers continue to advance our understanding about the relation between CEO succession and firm performance. Although a substantial body of work has been done on CEO succession, only a very few papers pay special attention to poorly performing firms (e.g., Hotchkiss Hotchkiss may refer to:
A situation where a company that has had poor performance for an extended period of time experiences a positive reversal. Notes: A speculator may profit from a turnaround if he or she accurately anticipates the improvement of a poorly performing company. . In summary, I find a negative relation between the change in board size and post-CEO-succession operational performance in the CEO succession year, which is consistent with previous studies (e.g., Eisenberg Eisenberg can refer to:
The remainder of the article is organized as follows. The next section reviews the development of literature associated with board restructure and CEO succession and proposes hypothesis. Section 3 describes the methodology, data collection procedures and the formation of final sample. Section 4 discusses the empirical results. Section 5 presents the summary and conclusions focusing on the implications and ideas for further research. 2. LITERATURE REVIEW AND HYPOTHESIS DEVELOPMENT Following a CEO turnover, a new CEO may want to restructure the board to be able to initiate new strategic plans and charges in the firm. The board restructure may consist of two components. First, the size of board of directors will change after CEO succession. Second, more outsider Outsider often refers to one identified as on the periphery of social norms, one living or working apart from mainstream society, or one observing a group from the outside, as used in:
v. t. 1. To turn (an opportunity) to one's advantage; to take advantage of (a situation); to profit from; as, to capitalize on an opponent's mistakes s>. the diverse expertise of the larger board. Another theory proposes that board size is negatively related to financial performance. Some researchers argue that a large board may be more difficult for the CEO to manipulate manipulate To cause a security to sell at an artificial price. Although investment bankers are permitted to manipulate temporarily the stock they underwrite, most other forms of manipulation are illegal. and a larger board would offer a greater breadth of experience. A substantial body of literature suggests that a large board would result in closer alignment Alignment is the adjustment of an object in relation with other objects, or a static orientation of some object or set of objects in relation to others.
Hermalin and Weisbach (2003) derive de·rive v. 1. To obtain or receive from a source. 2. To produce or obtain a chemical compound from another substance by chemical reaction. some key findings from the empirical literature on boards that board size is negatively related to corporate performance. Jensen Noun 1. Jensen - modernistic Danish writer (1873-1950) Johannes Vilhelm Jensen (1993) proposes that a smaller number of board members produce a more effective control mechanism. Changanti, Mahajan Mahajan is an Indian surname, found among the Vaishya castes (business communities). In India surname Mahajan is used by two communities: - one residing in North of India(mainly on the Amritsar to Jammu belt) and another belonging to North Maharashtra. , and Sharma Sharma is one of the most common Brahmin surnames among Hindus in India, Nepal and other countries. Meaning of the Surname Sharma is derived from the Sanskrit 'Sharman' which means teacher. According to Sanskrit scholar Dr. (1985) also suggest that smaller boards play a more important control function whereas larger boards have difficulty in coordinating co·or·di·nate n. 1. One that is equal in importance, rank, or degree. 2. coordinates A set of articles, as of clothing or luggage, designed to match or complement one other, as in style or color. 3. their efforts, which leaves managers free to pursue their own goals. The empirical evidence has found that firms with smaller boards have a stronger relation between firm performance and CEO succession than do firms with larger boards, consistent with the view that smaller boards are more effective overseers of the CEO than larger boards (e.g., Eisenberg, Sundgren and Wells, 1998; Yermack, 1996; Wu, 2000). I argue that the rationale rationale (rash´  nal´),n the fundamental reasons used as the basis for a decision or action. for desirability of smaller boards is that they achieve greater focus and interaction, have greater cohesiveness, have better communication and decision making process, and are harder to be manipulated by the CEOs. In particular, in response to poor performance, smaller boards may not be paralyzed par·a·lyze tr.v. par·a·lyzed, par·a·lyz·ing, par·a·lyz·es 1. To affect with paralysis; cause to be paralytic. 2. To make unable to move or act: paralyzed by fear. by free-riding Free-riding A forbidden practice in which the member of an underwriting syndicate retains a portion of an initial public offering (IPO) and resells the securities at a higher price determined by the market at a later time. problem or otherwise plagued with inertia inertia (ĭnûr`shə), in physics, the resistance of a body to any alteration in its state of motion, i.e., the resistance of a body at rest to being set in motion or of a body in motion to any change of speed or change in direction of the way in which larger boards are in financially distressed firms. Smaller boards are more effective at obtaining inside information that ultimately will be reflected in measured performance (Hermalin and Weisbach, 2003). Therefore, I suggest that a firm with a small board size will perform better than a firm with a large board when a firm is financially distressed. What I investigate in this research is to see whether the change in board size has an important impact on post-CEO-succession financial performance. Based on previous board literature, I expect that there is a negative relation between the change in board size and post-succession operational performance. Thus, I provide my hypothesis 1: Hypothesis 1. The change in board size at poorly performing firms will be negatively associated with post-CEO-succession operational performance. According to board composition theory, a firm's board composition has no relation to corporate financial performance. In a recent meta-analysis meta-analysis /meta-anal·y·sis/ (met?ah-ah-nal´i-sis) a systematic method that takes data from a number of independent studies and integrates them using statistical analysis. , no empirical evidence of substantive Substantive may refer to: In grammar:
I argue that in poorly performing firms, board composition may be more important than in regular situations. The increase in outsider director in poorly performing firms will have a positive impact on the corporate governance and managerial improvement, thus increasing post-succession operational performance. Compared with insider directors, outsider directors have more incentives to do a better job for their good reputation at directorship market and related financial benefits from independent monitoring functions (Perry, 2000). Therefore, I expect a positive relation between board composition and post-CEO-succession operational performance in troubled firms. The above arguments lead to hypothesis 2: Hypothesis 2. The change in board composition at poorly performing firms will be positively associated with post-CEO-succession operational performance. 3. DATA AND METHODOLOGY 3.1 Sample and Data Collection In most CEO succession studies, researchers examine CEO succession impact on financial performance without using pre-CEO-succession financial performance as one important criterion
American publisher and businessman who founded and edited (1916-1954) Forbes magazine. His son Malcolm Stevenson Forbes annual survey of compensation from 1983 to 2002. In addition, I use Lexis/Nexis, proxy statements Proxy Statement A document containing the information that a company is required by the SEC to provide to shareholders so they can make informed decisions about matters that will be brought up at an annual stockholder meeting. , Wall Street Journal Index, and New York New York, state, United States New York, Middle Atlantic state of the United States. It is bordered by Vermont, Massachusetts, Connecticut, and the Atlantic Ocean (E), New Jersey and Pennsylvania (S), Lakes Erie and Ontario and the Canadian province of Times Index as a second source to identify that a CEO succession in this study is not directly related to a takeover, spin-off The situation that arises when a parent corporation organizes a subsidiary corporation, to which it transfers a portion of its assets in exchange for all of the subsidiary's capital stock, which is subsequently transferred to the parent corporation's shareholders. or divesture Di`ves´ture n. 1. Divestiture. . I obtain 1053 CEO successions between January January: see month. 1, 1984 and December December: see month. 31, 1999. Second, I use COMPUSTAT '''Standard & Poor's Compustat® is a database of financial, statistical and market information on active and inactive companies throughout the world. Compustat® data has a reputation for extensive coverage, standardization, expertise and timeliness. database to find out whether these 1053 observations have low Z-scores (< 1.81) before CEO successions. Z score is a blend of traditional financial ratios based on a statistical method known as multiple discriminate analysis Discriminate analysis A statistical process that links the probability of default to a specified set of financial ratios. (MDA (1) (Monochrome Display Adapter) The first IBM PC monochrome video display standard for text. Due to its lack of graphics, MDA cards were often replaced with Hercules cards, which provided both text and graphics. See PC display modes and Hercules Graphics. ). Z score is known to be about "90 % accurate in forecasting business failure one year into the future" (Siegel Siegel, a surname, is associated with two ethnic groups. As a Jewish surname Siegel (סג"ל) it could be an acronym of Segan Levi (סגן לוי), meaning "Assistant Levite". , Shim A small piece of software that is added to an existing system program or protocol in order to provide some enhancement. (jargon, memory management) shim - A small piece of data inserted in order to achieve a desired memory alignment or other addressing property. , and Hartman Hartman may refer to: Surname
A statistical measure that quantifies the distance (measured in standard deviations) a data point is from the mean of a data set. In a more financial sense, Z-score is the output from a credit-strength test that gauges the likelihood of bankruptcy. model is its ability to withstand certain types of accounting irregularities and earning management. Consider the recent high-profile bankruptcy bankruptcy, in law, settlement of the liabilities of a person or organization wholly or partially unable to meet financial obligations. The purposes are to distribute, through a court-appointed receiver, the bankrupt's assets equitably among creditors and, in most of WorldCom The former name of MCI. Based in Jackson, MS, WorldCom, Inc. was a major, international telecommunications carrier. It was founded in 1983 by Bernard Ebbers as Long Distance Discount Service (LDDS), a reseller of AT&T WATS lines to small businesses. , in which management "cooked the book and improperly im·prop·er adj. 1. Not suited to circumstances or needs; unsuitable: improper shoes for a hike; improper medical treatment. 2. recorded billions of dollars as capital expenditures instead of as operating expenses Operating expenses The amount paid for asset maintenance or the cost of doing business, excluding depreciation. Earnings are distributed after operating expenses are deducted. " (Chuvakhin and Gertmenian, 2003). Such a treatment would overestimate o·ver·es·ti·mate tr.v. o·ver·es·ti·mat·ed, o·ver·es·ti·mat·ing, o·ver·es·ti·mates 1. To estimate too highly. 2. To esteem too greatly. earnings and overestimate assets. But one year before its filing for Chapter 11 bankruptcy, WorldCom's Z score is around "0.798 in 2001, much below the safe standard" (Chuvakhin and Gertmenian, 2003). A deteriorating de·te·ri·o·rate v. de·te·ri·o·rat·ed, de·te·ri·o·rat·ing, de·te·ri·o·rates v.tr. To diminish or impair in quality, character, or value: Z-Score can accurately signal financial trouble ahead and provide a simple conclusion than a number of other financial ratios. Given its reliability, Z score is probably better used as a gauge for relative financial health. This is the reason why I use low Z-scores in the one year prior to CEO successions as a main indicator to identify poorly performing firms. If a CEO succession event is taken place before July July: see month. 1, the previous year's Z-score of troubled firm is used considering that the departing CEO should be blamed for poor financial performance. If CEO succession is announced in the second half of the fiscal year, the current fiscal year's Z-score of troubled firm is used because it is the same year in which a CEO succession event takes place. Finally, a total 101 CEO successions at 93 sample firms meet the low Z score requirements before CEO succession in 1053 CEO observations between 1984 and 1999. Table 1 presents description of the CEO succession samples in this study. 101 of 1,053 observations that are related to the CEO successions have low Z scores before CEO successions. Consistent with the survey on CEO succession conducted by Booz Allen Hamilton, the increasing pattern of CEO successions can be observed after 1993. At the same time, the poor-performance-related CEO successions increase, too. 3.2 Methodology To identify the sources of any changes in operating performance after CEO succession, I use operating income Operating Income The profit realized from a business' own operations. Notes: This would not include income from things such as investments in other firms. Also referred to as operating profit or recurring profit. return on sales Return on sales A measurement of operational efficiency equalingnet pre-tax profits divided by net sales expressed as a percentage. return on sales The portion of each dollar of sales that a firm is able to turn into income. (OROS OROS Operating Return On Sales OROS Oregon Radiation Oncology Society ) as the primary operational performance measurement in this study. I define the CEO succession year as Year 0 in this study. The sample time period is from one year before CEO succession until 2 years after CEO succession (Year -1 to Year +2). I identify each CEO succession year by examining the exact CEO succession news event at the different time periods of a certain fiscal year. To help ensure that improvements in performance are not industry-driven, I adjust the financial ratios by using the performance-based control group matching method described in Barber A barber (from the Latin barba, "beard") is someone whose occupation is to cut any type of hair, give shaves, and trim beards. In previous times, barbers also performed surgery and dentistry. and Lyon Lyon English Lyons City (pop., 1999: city, 445,452; metro. area, 1,348,932), east-central France. Located at the confluence of the Rhône and Saône rivers, it was founded as the Roman military colony Lugdunum in 43 BC (see (1996). The industry comparison group will isolate isolate /iso·late/ (i´sah-lat) 1. to separate from others. 2. a group of individuals prevented by geographic, genetic, ecologic, social, or artificial barriers from interbreeding with others of their kind. the industry effects of different sample firms, which can provide a more reliable financial analysis of pre- pre- word element [L.], before (in time or space). pre- pref. 1. Earlier; before; prior to: prenatal. 2. and post-CEO-succession financial performance. I follow the Barber and Lyon (1996) method by using two characteristics to establish my industry comparison group for each sample. First, I identify all firms in the same four-digit or two-digit Standard Industrial Classification (SIC) code. Second, I apply 90% to 110% filter of pre-CEO-succession Z score at Year -1 to identify the industry comparison group. Comparison firms' Z score performance measures over one year before CEO succession are in the range of -10% to +10% of the sample firm's Z score. Finally, out of 101 observations, I construct 83 industry comparison groups for 83 sample firms as the final remaining sample data set. In this study, I use ordinary least squares (OLS OLS Ordinary Least Squares OLS Online Library System OLS Ottawa Linux Symposium OLS Operation Lifeline Sudan OLS Operational Linescan System OLS Online Service OLS Organizational Leadership and Supervision OLS On Line Support OLS Online System ) regression regression, in psychology: see defense mechanism. regression In statistics, a process for determining a line or curve that best represents the general trend of a data set. models to test my hypotheses. The dependent variables in these regression models are changes in the primary operational performance measurement--OROS. In model 1, model 2 and model 3, the dependent variables are changes in unadjusted OROS. The dependent variables in model 4, model 5 and model 6 are changes in OROS adjusted by subtracting median OROS for an industry comparison group matched by four-digit or two-digit SIC code and by previous OROS (industry comparison group-adjusted). Model 1 and model 4 measure OROS changes around CEO succession from Year -1 to Year 0. Model 2 and model 5 measure OROS changes around CEO succession from Year 0 to Year +1. Model 3 and model 6 measure OROS changes around CEO succession from Year +1 to Year +2. Four variable groups are classified in these OLS regression models: firm characteristics, CEO characteristics, board characteristics, and strategic changes. Firm characteristics variables include lagged firm size (SIZE, log of firm's sales), pre-CEO-succession financial performance (PRE-OROS), and regulated reg·u·late tr.v. reg·u·lat·ed, reg·u·lat·ing, reg·u·lates 1. To control or direct according to rule, principle, or law. 2. industry (REG). REG is a dummy variable This article is not about "dummy variables" as that term is usually understood in mathematics. See free variables and bound variables. In regression analysis, a dummy variable which equals to 1 if a firm is in a regulated industry; and 0 otherwise. Firm size would define the ways in which the board of directors recruits the next CEO successor for the firm. According to the managerial talent hypothesis (Hubbard and Palia, 1995), large firms require their CEOs to have more duties, skills and capabilities to handle with many management issues because large firms have more diversified diversified (di·verˑ·s business lines and multinational operations A collective term to describe military actions conducted by forces of two or more nations, usually undertaken within the structure of a coalition or alliance. See also alliance; coalition; coalition action. . I argue that it is very hard to see an immediate post-succession operating performance improvement in large firms because the learning time may be longer for CEO successors to manage those firms. Therefore, I expect a negative relation between firm size and post-succession operational performance. Regulated industry was coded as a dummy variable which equals to 1 if a firm is in a regulated industry and 0 otherwise. I define regulated firms as those whose primary business is on the communications (SIC code 48), gas and electric (SIC code 49), or financial (SIC code 60-69) industries. Industry characteristics and environments, such as in regulated industry, have significant impacts on managerial discretion (Finkelstein Finkelstein (פֿינק(ע)לשׁטײַן, פינקלשׁט(י)ין, and Hambrick, 1996). CEO successors have to learn more industry-specific knowledge and regulation-related expertise to take the helm of firms in a regulated industry. I propose that a regulated firm may not improve operating performance so easily after a CEO succession because it is very hard to redirect re·di·rect tr.v. re·di·rect·ed, re·di·rect·ing, re·di·rects To change the direction or course of. n. A redirect examination. re firms in regulated industry under more policy constraints CONSTRAINTS - A language for solving constraints using value inference. ["CONSTRAINTS: A Language for Expressing Almost-Hierarchical Descriptions", G.J. Sussman et al, Artif Intell 14(1):1-39 (Aug 1980)]. and regulations. In addition, there are more internal well-established conservative corporate culture and built-in built-in - (Or "primitive") A built-in function or operator is one provided by the lowest level of a language implementation. This usually means it is not possible (or efficient) to express it in the language itself. inertia that will resist any potential strategic change in a regulated organization. Therefore, I expect a negative relation between a regulated industry dummy variable and post-succession operational performance. CEO characteristics group includes the following variables. TENURE measures the years of an outgoing senior executive who work as a CEO in the sample firm. CEO successor type (CEOTYPE) is classified into three groups. Outsider CEOs are the CEOs who just join the firm at the time of appointment. CEO trainees are the CEOs who work at the firm for less than 2 years at the time of appointment. Insider CEOs are the CEOs who work at the firm for longer than 2 years at the time of appointment. CEO duality Duality (physics) The state of having two natures, which is often applied in physics. The classic example is wave-particle duality. The elementary constituents of nature—electrons, quarks, photons, gravitons, and so on—behave in some respects (DUALITY) is a dummy variable which equals one where a successor CEO has occupied the CEO and Chair of board of directors at the same time in the firm at the time of appointment; and 0 otherwise. AGE represents the age in whole years of a CEO successor at the time of appointment. JOIN indicates the number of years when the CEO successor has been in the firm. DIRECTOR shows the number of years when CEO successor has been the director of board in the firm at the time of appointment. In this study, all of CEO successors are white male. Hence, I do not take gender and ethnicity ethnicity Vox populi Racial status–ie, African American, Asian, Caucasian, Hispanic into consideration. Board characteristics variable group includes the change in board size ([DELTA]BSIZE) and the change in board composition ([DELTA]BCOMP). The change in board size is a dummy variable which equals one where there is a number difference between the directors in current time period and the previous year; and 0 otherwise. The change in the board composition ([DELTA]BCOMP) is another dummy variable which equals one where there is a percentage difference between the outsider directors over all directors in current time period and the previous year; and 0 otherwise. Insider directors are directors who are the current employees of the firm. Grey board directors are not the current employee directors who are either related to an executive officer of the firm, former executives of the firm, or consultants, attorneys, investment bankers Investment Banker A person representing a financial institution that is in the business of raising capital for corporations and municipalities. Notes: An investment banker may not accept deposits or make commercial loans. , etc. at other companies that have or may have substantial business relationships with the firms. All other directors are classified as outsider or independent directors. In this study, change in assets ([DELTA]ASSET) and change in employees ([DELTA]EMPLOY) are employed as two proxies to show the strategic changes in sample firms. Change in OROS = f (Size, Pre-CEO-Succession Financial Performance, Regulated Industry Dummy Sham; make-believe; pretended; imitation. Person who serves in place of another, or who serves until the proper person is named or available to take his place (e.g., dummy corporate directors; dummy owners of real estate). , Outgoing CEO Tenure, CEO Successor Type, CEO Duality Dummy, CEO Age, Join Firm, Directorship, Change in Board Size Dummy, Change in Board Composition Dummy, [DELTA]ASSET, [DELTA]EMPLOY) 4. EMPIRICAL RESULTS 4.1 Firm, Board and CEO Characteristics Results Table 2 describes the characteristics of sample firms with industry comparison groups. This table presents the summary statistics of total assets (in million dollars), employee numbers (in thousand) and sales assets (in million dollars) from Year -1 to Year +2 for these 83 sample firms. From this table, we can see that average and median changes in total assets increase slightly following CEO succession and continue to improve substantially for two years. Table 2 also reports that the average sales in the sample firms increases slightly following CEO succession and continues to improve for two years. As seen in Table 3, average number of employees in sample firms decreases following CEO succession and continue to shrink shrink Vox populi noun A psychiatrist for two years. Table 3 reports the summary statistics of board restructure in 83 final sample firms. I collect information for each firm on the size of board, the numbers of insider directors, the numbers of gray (affiliated) directors, and the number of outsider or independent directors from proxy statements. Table 3 shows that the average board size in sample firms decreases following CEO succession and continues to decline for two years. As seen in Table 3, the mean (median) board size is 11.89 (11.0) in Year -1 while the mean (median) board size is 11.59 (12.0) in Year 0. There is a continuous downsizing (1) Converting mainframe and mini-based systems to client/server LANs. (2) To reduce equipment and associated costs by switching to a less-expensive system. (jargon) downsizing of the board in these sample firms. The mean (median) board size for poorly performing firms is 11.39 (10.0) directors in Year +1 and 11.23 (11.0) directors in Year +2, respectively, and this difference is significant at 5 percent level between board size in Year +2 and in Year 0 (t-statistic = 2.604). It is not surprising that poorly performing firms have significantly lower board size following CEO successions. One explanation is that new CEOs know that smaller boards are more effective than larger boards and shrink board size (e.g., Eisenberg, Sundgren and Wells, 1998; Yermack, 1996; Wu, 2000). Overall, these results indicate that new CEOs play a more active role in downsizing board size following CEO successions. Table 4 reports data on board restructure on the basis of CEO successor type. As shown in Panel C of Table 4, the mean (median) board size is 11.74 (12.0) in Year 0 when CEO successor is an insider. There is a continuous downsizing of the boards in these sub-sample firms. The mean (median) board size in poorly performing firms with insider CEO successions is 11.66 (11.0) directors in Year +1 and 11.40 (11.0) directors in Year +2, respectively. When CEO successor is an insider, the average board size decreases by about 0.34 members (from 11.74 to 11.40) over the two years following CEO succession. This difference is significant at 5 percent level between board size in sub-sample firms with insider CEO succession in Year +2 and in Year 0 (t-statistic = 2.065). Board size in sub-sample firms with insider CEO succession in Year +2 and in Year 0, however, is not significantly different while CEO successor is an outsider. As shown in Panel C of Table 5, we can see that the downsizing of board is more sustainable following CEO succession when CEO successor is an insider. This evidence shows that insider CEO successors are more likely to cut board size following CEO successions. Panel D of Table 4 contains information on board size change grouped by CEO successor type in Year +1. When CEO successor is an outsider, there is no too much change in board size in one year following the CFO See Chief Financial Officer. succession year, compared with board size in Year 0. 7 out of 10 sample firms do not change the board size in one year following the succession year. One explanation is that outsiders need more cooperation from boards and it may be impossible for them to cut board size when taking over the control. Panel E of Table 4 contains information on board size change grouped by CEO successor type in Year +2. When CEO successor is an outsider, there is no too much change in board size in two years following the CEO succession year, compared with board size in Year 0. When CEO successor is an insider, we see more downsizing of board size in two years following the succession year. For example, 25 out of 61 sample firms keep the board size intact in two years following the succession year. 13 out of 61 sample firms cut one board director in two years following the succession year, compared with board size in Year 0.7 out of 61 sample firms cut two board directors in two years following the succession year, compared with board size in Year 0.4 out of 61 sample firms cut three board directors in two years following the succession year, compared with board size in Year 0. 4.2 Regression Results In Table 5, I report the results of regressions of changes in OROS around CEO successions. Table 5 is estimated with the changes in unadjusted and industry-adjusted OROS as dependent variables on a yearly basis. The dependent variable in model 1 of Table 5 represents the differences between unadjusted OROS in Year 0 and unadjusted OROS in Year -1. There are two significant variables, both of which related to board characteristics. Model 1 of Table 5 shows that the regression coefficient Regression coefficient Term yielded by regression analysis that indicates the sensitivity of the dependent variable to a particular independent variable. See: Parameter. regression coefficient for the change in board size ([DELTA]BSIZE) is negative and significant at 5 percent level (t-statistic = -2.2). This result indicates that in Year 0, the change in board size is negatively related to post-CEO-succession operational performance (unadjusted OROS). Hypothesis 1 forecasts a negative relation between the change in board size and post-CEO-succession operational performance. Thus, Hypothesis 1 is supported. The second significant variable is the change in board composition ([DELTA]BCOMP). Model 1 of Table 5 reports that the regression coefficient for the change in board composition ([DELTA]BCOMP) is positive and significant at 5 percent level (t-statistic = 2.148). This result indicates that in Year 0, the change in board composition is positively related to post-CEO-succession operational performance (unadjusted OROS). As discussed above, hypothesis 2 expects a positive relation between the change in board composition and post-CEO-succession operational performance. Thus, hypothesis 2 receives some support. The dependent variable in model 2 of Table 6 represents the differences between unadjusted OROS in Year +1 and unadjusted OROS in Year 0. Overall, there is evidence consistent with hypothesis 1 which forecasts a negative relation between the change in board size and post-CEO-succession operational performance. My results in Table 5 also support hypothesis 2 which expected a positive relation between the change in board composition and post-CEO-succession operational performance. 5. CONCLUSION This study focuses on the relation between post-CEO-succession operational performance and board restructure in poorly performing firms. The empirical results in this study show a negative relation between the change in board size and post-CEO-succession operational performance in the CEO succession year, which is consistent with the view that smaller boards are more effective overseers of the CEO than larger boards (e.g., Eisenberg, Sundgren and Wells, 1998; Jensen, 1993; Yermack, 1996; Wu, 2000). My results also report a positive relation between the change in board composition and post-CEO-succession operational performance in the CEO succession year, which is consistent with the finding of Rhoades, Rechner, Sundaramurthy (2000). This study advances understanding of the role of board restructuring restructuring - The transformation from one representation form to another at the same relative abstraction level, while preserving the subject system's external behaviour (functionality and semantics). during the timing of CEO succession in poorly performing firms, but it has limitations. First, due to the definition of troubled firms in this study, the sample size is relatively small. Second, one regulated industry (electric and gas services) has a higher weight in total sample. Third, although I use a long sample time period and performance-based industry-adjusted matching method suggested in Barber and Lyon (1996) to measure post-succession operational performance, which also may be influenced by mean-reversion of the accounting-based performance time series rather than CEO succession. So the findings and implications of this study must be considered in light of its limitations. Finally, my study indirectly indicates that in financially distressed firms, the change in board composition plays a larger and more complex role to influence operational performance in the CEO succession year than in the normal operational situations. The magnified impact of the change in board composition on financial performance under certain circumstances CIRCUMSTANCES, evidence. The particulars which accompany a fact. 2. The facts proved are either possible or impossible, ordinary and probable, or extraordinary and improbable, recent or ancient; they may have happened near us, or afar off; they are public or and the interaction between the change in board composition and senior executive successions may be more complicated than we anticipated before and further research is needed. Future research should also be continued at succession planning Management Succession Planning In organizational development, succession planning is the process of identifying and preparing suitable employees through mentoring, training and job rotation, to replace key players — such as the chief executive officer (CEO) — area in poorly performing firms. A primary data source for 1053 CEO successions between January 1, 1984 and December 31, 1999 is the senior executive list provided in the Forbes annual survey of compensation from 1983 to 2002. In addition, I use Lexis/Nexis, proxy statements, Wall Street Journal Index, and New York Times Index as a second source to confirm that these CEO successions are not directly related to a takeover, spin-off or divesture. To be included in my sample, I use the Standard and Poor's Noun 1. Standard and Poor's - a broadly based stock market index Standard and Poor's Index COMPUSTAT database to find out whether these 1053 observations have low Z-scores (< 1.81) before CEO successions. Finally, a total 101 CEO successions at 93 sample firms meet the low Z score requirements before CEO succession in 1053 CEO observations between 1984 and 1999. The original sample consists of 101 observations of 93 sample firms that had CEO successions between January 1, 1984 and December 31, 1999. The year of CEO succession refers to year 0. The previous year of CEO succession year is year -1. To control for the industry effects, I adjust the financial ratios by using the performance-based control group matching method described by Barber and Lyon (1996). The industry comparison group will isolate the industry effects of different sample firms, which can provide a more reliable financial analysis of pre- and post-CEO-succession financial performance. First, a matched industry comparison group is constructed for each sample firm on the basis of four-digit or two-digit Standard Industrial Classification (SIC) code. Second, 90% to 110% filter of pre-CEO-succession Z score at Year -1 is employed to identify the portfolio firms in industry comparison group. Finally, out of 101 observations, only 83 industry comparison groups are constructed for 83 sample firms. The final remaining sample is composed of the set of 83 sample firms from 1984 to 1999. The table 2 presents the summary statistics of total assets (in million dollars), employee numbers (in thousand) and sales assets (in million dollars) from year -1 to year +2 for these 83 sample firms. All accounting and financial data are from Compustat. The final remaining sample is composed of the set of 83 sample firms from 1984 to 1999. To control for the industry effects, I adjust the financial ratios by using the performance-based control group matching method described by Barber and Lyon (1996). First, a matched industry comparison group is constructed for each sample firm on the basis of four-digit or two-digit Standard Industrial Classification (SIC) code. Second, 90% to 110% filter of pre-CEO-succession Z score at Year -1 is employed to identify the portfolio firms in industry comparison group. Finally, out of 101 observations, only 83 industry comparison groups are constructed for 83 sample firms. The year of CEO succession refers to year 0. The previous year of CEO succession year is year -1. Board size, composition data and characteristics are from proxy statements of all sample firms. Insider directors are directors who are the current employees of the firm. Grey board directors are not the current employee directors who are either related to an executive officer of the firm, former executives of the firm, or consultants, attorneys, investment bankers, etc. at other companies that have or may have substantial business relationships with the firms. All other directors are classified as outsider or independent directors. P-values for significance of differences between sample firms in Year +1 or in Year +2 and sample firms in Year 0 are calculated using a t-test t-test, n an inferential statistic used to test for differences between two means (groups) only. This statistic is used for small samples (e.g., N < 30). Also called t-ratio, stu-dent's t. for means and a Wilcoxon Wilcoxon is a surname, and may refer to:
The sample consists of 83 firms with CEO successions between 1984 and 1999. The year of CEO succession refers to year 0. Outsider CEOs are the CEOs who just join the firm at the time of appointment. CEO trainees are the CEOs who work at the firm in less than 2 years at the time of appointment. Insider CEOs are the CEOs who work at the firm in longer than 2 years. CEO information, board size, composition data and characteristics are from proxy statements of all sample firms. Insider directors are directors who are the current employees of the firm. Grey board directors are not the current employee directors. All other directors are classified as outsider directors. P-values for significance of differences between sample firms in Year +1 or in Year +2 and sample firms in Year 0 are calculated using a t-test for means and a Wilcoxon rank-sum test for medians. This table reports the results of regressions of changes in operating return on sales (OROS) around CEO succession in 83 sample firms from Year -1 to Year +2 between 1984 and 1999. The year of CEO succession refers to year 0. The previous year of CEO succession year is year -1. To control for the industry effects, I adjust the financial ratios by using the performance-based control group matching method. First, a matched industry comparison group is constructed for each sample firm on the basis of four-digit or two-digit Standard Industrial Classification (SIC) code. Second, 90% to 110% filter of pre-CEO-succession Z score at Year -1 is employed to identify the portfolio firms in industry comparison group. Finally, out of 101 observations, only 83 industry comparison groups are constructed for 83 sample firms. The final remaining sample is composed of the set of 83 sample firms from 1984 to 1999. The dependent variable in model 1-3 is the change in operating return on sales (unadjusted OROS). The dependent variable in model 4-6 is the change in OROS adjusted by subtracting median OROS for a industry comparison group matched by four-digit or two-digit SIC code and by previous financial performance (industry comparison group-adjusted OROS). Model 1 and 4 measure the changes around CEO succession from Year -1 to Year 0. Model 2 and 5 measure the changes around CEO succession from Year 0 to Year +1. Model 3 and 6 measure the changes around CEO succession from Year +1 to Year +2. I classify clas·si·fy tr.v. clas·si·fied, clas·si·fy·ing, clas·si·fies 1. To arrange or organize according to class or category. 2. To designate (a document, for example) as confidential, secret, or top secret. the four variable groups: firm characteristics, CEO characteristics, board of director, and strategic changes. Firm characteristics variables include lagged firm size (SIZE, log of firm's sales), pre-CEO-succession OROS (PRE-OROS), and regulated industry (REG, dummy variable equals to 1 if a firm is in a regulated industry and 0 otherwise, regulated firms are defined as those whose primary business is on the communications (SIC code 48), gas and electric (SIC code 49), or financial (SIC code 60-69) industries). CEO characteristics group includes outgoing CEO tenure (TENURE), CEO successor type (CEOTYPE, I classify CEO successors into 3 groups. Outsider CEOs are the CEOs who just join the firm at the time of appointment. CEO trainees are the CEOs who work at the firm in less than 2 years at the time of appointment. Insider CEOs are the CEOs who work at the firm in longer than 2 years at the time of appointment), CEO duality (DUALITY, CEO duality dummy equals one where successor CEO has occupied the CEO and Chair of board of directors at the same time in the firm at the time of appointment and 0 otherwise), CEO successor age at the time of appointment (AGE), years when CEO successor has been in the firm (JOIN), years when CEO successor has been the director of board in the firm at the time of appointment (DIRECTOR). Board of director groups includes the changes in board size ([DELTA]BSIZE, the change in board size dummy equals one where there is a number difference between the directors in current time period and the previous year and 0 otherwise) and change in the board composition ([DELTA]BCOMP, the change in board composition dummy equals one where there is a percentage difference between the outsider directors over all directors in current time period and the previous year and 0 otherwise). Insider directors are directors who are the current employees of the firm. Grey board directors are not the current employee directors who are either related to an executive officer of the firm, former executives of the firm, or consultants, attorneys, investment bankers, etc. All other directors are classified as outsider or independent directors. I use the changes in assets ([DELTA]ASSET) and employees ([DELTA]EMPLOY) as 2 proxies to show the strategic changes in sample firms. REFERENCES Alexander, J. A, Fennell, M. L., Halpern, M. T., "Leadership Instability instability /in·sta·bil·i·ty/ (-stah-bil´i-te) lack of steadiness or stability. detrusor instability in Hospitals: The Influence of Board-CEO Relations and Organizational Growth and Decline", Administrative Science Quarterly Administrative Science Quarterly, founded in 1956, is one of the most eminent academic journals in the field of organizational studies. It is published by Cornell University. People claimed to have been involved as founders include James D. , Vol. 38, 1993, 74-99. Barber, Brad M. and John D. Lyon, "Detecting Abnormal abnormal /ab·nor·mal/ (ab-nor´mal) not normal; contrary to the usual structure, position, condition, behavior, or rule. abnormal, adj Operating Performance: The Empirical Power and Specification of Test Statistics", Journal of Financial Economics, Vol. 41, 1996, 359-399. Chuvakhin, N., and Gertmenian, W., "Predicting Bankruptcy in the WorldCom Age", Journal of Contemporary Business Practice", Vol. 6, 2003, 3-8. Daily, C.M. and J.L. Johnson, "Sources of CEO Power and Firm Financial Performance: A Longitudinal lon·gi·tu·di·nal adj. Running in the direction of the long axis of the body or any of its parts. Assessment", Journal of Management, Vol. 23 (2), 1997, 97-117. Dalton, D. R., Daily, C. M., Ellstrand, A. E., and Johnson, J. L. "Meta-Analytic Reviews of Board Composition, Leadership Structure, and Financial Performance", Strategic Management Journal, Vol. 19, 1998, 269-290. Dalton, D.R. and P.L. Rechner, "On the Antecedents of Corporate Severance Agreements Noun 1. severance agreement - an agreement on the terms on which an employee will leave agreement, understanding - the statement (oral or written) of an exchange of promises; "they had an agreement that they would not interfere in each other's business"; "there was : An Empirical Assessment", Journal of Business Ethics business ethics, the study and evaluation of decision making by businesses according to moral concepts and judgments. Ethical questions range from practical, narrowly defined issues, such as a company's obligation to be honest with its customers, to broader social , Vol. 8, 1989, 455-462. Dalton, Dan R.; Daily, Catherine M., "Number of Directors and Financial Performance: A Meta-Analysis", Academy of Management Journal, Vol. 42, 1999, 674-687. Eisenberg, T., Sundgren S., and Wells, M., "Larger Board Size and Decreasing Firm Value in Small Firms", Journal of Financial Economic, Vol. 48, 1998, 35-54. Goodstein, J., Gautam, K., & Boeker, W., "The Effects of Board Size and Diversity on Strategic Change", Strategic Management Journal, Vol. 15, 1994, 241-250. Hermalin, Benjamin E. and Michael Michael, archangel Michael (mī`kəl) [Heb.,=who is like God?], archangel prominent in Christian, Jewish, and Muslim traditions. In the Bible and early Jewish literature, Michael is one of the angels of God's presence. S. Weisbach, "Boards of Directors as an Endogenously en·dog·e·nous adj. 1. Produced or growing from within. 2. Originating or produced within an organism, tissue, or cell: endogenous secretions. Determined Institution: A Survey of the Economic Literature", Economic Policy Review, Vol. 9, 2003, 7-26. Hotchkiss, Edith Shwalb, "Postbankruptcy Performance and Management Turnover", Journal of Finance, Vol. 50, 1995, 3-21. Hubbard, R.G., and Palia, D., "Executive Pay and Performance: Evidence from the U.S. Banking Industry", Journal of Financial Economics, Vol. 39, 1995, 105-130. Huson, M., and Malatesta P. and Parrino, R., "Managerial Succession and Firm Performance", Journal of Financial Economics, Vol. 74, 2004, 237-275. Jensen, M. C., "The Modern Industrial Revolution, Exit, and the Failure of Internal Control Systems", Journal of Finance, Vol. 48, 1993, 831-880. Lucier, Chuck, Eric ERIC Educational Research Information Clearinghouse ERIC Educational Resources Information Center ERIC ERISA Industry Committee ERIC Epidemiologic Research and Information Center (Durham, NC) Spiegel, and Rob Schuyt, Why CEOs Fall: The Causes and Consequences of Turnover at the Top, 2002; Strategy+business., www.strategy-business.com. Perry, T., "Incentive Compensation for Outsider Directors and CEO Turnover", Arizona State University Arizona State University, at Tempe; coeducational; opened 1886 as a normal school, became 1925 Tempe State Teachers College, renamed 1945 Arizona State College at Tempe. Its present name was adopted in 1958. working paper, 2000. Rhoades, D., Rechner, P., Sundaramurthy, C., "Board Composition and Financial Performance: A Meta-Analysis of the Influence of Outside Directors", Journal of Managerial Issues, Vol. 12, 2000, 76-92. Siegel, J., Shim, J., and Hartman, S., The McGraw-Hill The McGraw-Hill Companies, Inc., (NYSE: MHP) is a publicly traded corporation headquartered in Rockefeller Center in New York City. Its primary areas of business are education, publishing, broadcasting, and financial and business services. Pocket Guide to Business Finance. McGraw-Hill, Inc., 1992. Wu, Y., Honey honey, sweet, viscid fluid produced by honeybees from the nectar of flowers. The nectar is taken from the flower by the worker bee and is carried in the honey sac back to the hive. , I Shrunk shrunk v. A past tense and a past participle of shrink. shrunk Verb a past tense and past participle of shrink shrunk, shrunken shrink the Board. University of Chicago Chicago, city, United States Chicago (shĭkä`gō, shĭkô`gō), city (1990 pop. 2,783,726), seat of Cook co., NE Ill., on Lake Michigan; inc. 1837. working paper, 2000. Yermack, D., "Higher Valuation of Companies with a Small Board of Directors", Journal of Financial Economics, Vol. 40, 1996, 185-212. Lei Wen, Buena Vista University Buena Vista University is a private 4-year college located in Storm Lake, Iowa. Founded in 1891 as Buena Vista College, it is affiliated with the Presbyterian Church. The university's 60-acre campus is situated on the shores of Storm Lake, a 3,200-acre natural lake. , Storm Lake, Iowa Storm Lake is a city in Buena Vista County, Iowa, United States. The population was 10,076 at the 2000 census. It is the county seat of Buena Vista CountyGR6. Storm Lake is home to Buena Vista University, originally Buena Vista College. , USA Dr. Lei Wen earned his Ph.D. at Southern Illinois University Carbondale Southern Illinois University Carbondale (SIUC but usually just referred to as SIU) is located in Carbondale, Illinois. The Carbondale campus is the flagship campus of the Southern Illinois University system, which includes SIU's smaller sister institution Southern Illinois in 2004. Currently he is an assistant professor of finance at Harold Harold, 1022?–1066, king of England (1066). The son of Godwin, earl of Wessex, he belonged to the most powerful noble family of England in the reign of Edward the Confessor. Through Godwin's influence Harold was made earl of East Anglia. Walter Wal·ter , Bruno 1876-1962. German conductor noted for his interpretations of Mozart and Mahler. Noun 1. Walter - German conductor (1876-1962) Bruno Walter Siebens School of Business, Buena Vista University, Iowa.
TABLE 1
YEAR DISTRIBUTION OF SAMPLE FIRMS
Low
CEO Z-score
Year Succession Sample Percentage Cum. Freq. Percentage
1984 18 1 5.6% 1 1.0%
1985 17 1 5.9% 2 2.0%
1986 23 2 8.7% 4 4.0%
1987 39 4 10.3% 8 7.9%
1988 28 3 10.7% 11 10.9%
1989 38 5 13.2% 16 15.8%
1990 48 9 18.8% 25 24.8%
1991 37 1 2.7% 26 25.7%
1992 29 2 6.9% 28 27.7%
1993 81 11 13.6% 39 38.6%
1994 98 11 11.2% 50 49.5%
1995 113 9 8.0% 59 58.4%
1996 104 9 8.7% 68 67.3%
1997 111 13 11.7% 81 80.2%
1998 127 8 6.3% 89 88.1%
1999 142 12 8.5% 101 100.0%
Total 1053 101 9.6%
TABLE 2
THE CHARACTERISTICS OF SAMPLE FIRMS WITH INDUSTRY COMPARISON GROUPS
Year -1 0 1 2
Total Assets (in million dollars)
Median 6330.33 6472.44 6700.73 6946.10
Mean 10192.21 10366.87 10667.21 11074.79
Standard Deviation 12362.16 12084.48 12171.31 12523.48
Minimum 69.53 42.93 56.21 174.45
Maximum 86705.00 81113.00 81091.00 80292.00
Employees (in thousand)
Median 9.27 8.24 9.13 9.30
Mean 25.16 23.60 22.97 22.77
Standard Deviation 43.59 38.11 35.73 35.07
Minimum 0.28 0.32 0.33 0.24
Maximum 301.54 256.21 219.84 225.35
Sales (in million dollars)
Median 2491.34 2369.94 2454.20 2576.44
Mean 4788.58 4873.71 4918.02 5143.97
Standard Deviation 7900.03 7858.58 7845.09 8594.58
Minimum 105.42 74.34 75.22 45.80
Maximum 64523.00 62716.00 64052.00 71940.00
TABLE 3
BOARD SIZE AND BOARD COMPOSITION OF SAMPLE FIRMS
Succession Insider Outsider Board
Year Board Director
Year-1 Median 2.00 7.00
18% 64%
Mean 2.39 7.22
20% 61%
Year 0 Median 1.00 8.00
8% 67%
Mean 1.63 7.54
14% 65%
Year +1 Median 1.00 7.00
Wilcoxon-test (-1.606) (-0.842)
Mean 1.71 7.37
T-test (-1.622) (1.108)
Year +2 Median 2.00 7.00
Wilcoxon-test (-2.18) ** (-1.445)
Mean 1.78 7.24
T-test (-2.251) ** (1.709) *
Succession Grey Board Total Board
Year Director Size
Year-1 Median 2.00 11.00
18%
Mean 2.29 11.89
19%
Year 0 Median 3.00 12.00
25%
Mean 2.42 11.59
21%
Year +1 Median 2.00 10.00
Wilcoxon-test -(-1.141) (-1.682) *
Mean 2.30 11.39
T-test (1.254) (1.645)
Year +2 Median 2.00 11.00
Wilcoxon-test (-1.833) * (-2.434) **
Mean 2.20 11.23
T-test (1.864) * (2.604) **
*** Indicates statistical significance at the 0.01 level.
** Indicates statistical significance at the 0.05 level.
* Indicates statistical significance at the 0.10 level.
TABLE 4
CHANGE IN BOARD GROUPED BY THE CHARACTERISTICS OF CEO SUCCESSORS
CEO Type in Insider Outsider
Succession Year Director Director
Panel A:
Outsider CEO Year 0 Median 1.0 8.0
Mean 1.4 7.6
Year 1 Median 2 8
Wilcoxon-test (-1.00) (-0.406)
Mean 1.6 7.7
T-test (-1.00) (-0.145)
Year 2 Median 2.0 7.5
Wilcoxon-test (-1.134) (-0.68)
Mean 1.7 7.7
T-test (-1.152) (-0.161)
Panel B:
CEO Trainee Year 0 Median 1.0 7.0
Mean 1.33 7.67
Year 1 Median 1.00 6.50
Wilcoxon-test (-1.00) (-1.581)
Mean 1.25 6.83
T-test (1.00) (1.603)
Year 2 Median 1.0 7.5
Wilcoxon-test (0.00) (-1.279)
Mean 1.33 6.92
T-test (0.00) (1.393)
Panel C:
Insider CEO Year 0 Median 1.0 8.0
Mean 1.72 7.51
Year 1 Median 2 7
Wilcoxon-test (-1.604) (-0.44)
Mean 1.82 7.43
T-test (-1.625) (0.582)
Year 2 Median 2.0 7.0
Wilcoxon-test (-1.877) * (-1.367)
Mean 1.89 7.23
T-test (-1.932) * (-0.000)
CEO Type in Grey Total
Succession Year Director Director
Size
Panel A:
Outsider CEO Year 0 Median 2.5 11.5
Mean 2.4 11.4
Year 1 Median 1 11.0
Wilcoxon-test (-1.225) (-0.816)
Mean 1.8 11.1
T-test (1.26) (0.896)
Year 2 Median 1.0 10.5
Wilcoxon-test (-1.382) (-0.535)
Mean 1.8 11.2
T-test (1.406) (0.514)
Panel B:
CEO Trainee Year 0 Median 2.0 10.0
Mean 2.00 11.00
Year 1 Median 2.00 9.50
Wilcoxon-test (-0.707) (-1.933) *
Mean 2.17 10.25
T-test (-0.692) (2.138)
Year 2 Median 2.0 10.5
Wilcoxon-test (-0.541) (-1.611) *
Mean 2.17 10.42
T-test (-0.561) (1.735)
Panel C:
Insider CEO Year 0 Median 3.0 12.0
Mean 2.51 11.74
Year 1 Median 2 11.0
Wilcoxon-test (-1.006) (-0.692)
Mean 2.41 11.66
T-test (1.062) (0.574)
Year 2 Median 2.0 11.0
Wilcoxon-test (-1.696) * (-1.957) **
Mean 2.28 11.40
T-test (1.781) * (2.065) **
Panel D:
Board Size Outsider CEO Insider
Change in Year 1 CEO Trainee CEO
Board Size -3 1 2 2
Board Size -2 0 0 3
Board Size -1 1 4 11
7 5 32
Board Size +1 1 1 10
Board Size +2 0 0 2
Board Size +3 0 0 1
Panel E:
Board Size Outsider CEO Insider
Change in Year 2 CEO Trainee CEO
Board Size -3 1 1 4
Board Size -2 0 1 7
Board Size -1 1 4 13
7 4 25
Board Size +1 0 2 7
Board Size +2 1 0 4
Board Size +3 0 0 1
TABLE 5
REGRESSION ANALYSIS OF CHANGES IN OPERATING RETURN ON SALES (OROS)
AROUND CEO SUCCESSION FROM YEAR -1 TO YEAR +2
All accounting and financial data are from Compustat. CEO information,
board size, board composition data and characteristics are from proxy
statements of all sample firms. Values are unstandardized regressions
coefficient and t-test results. The values of t-tests are given in
parentheses.
Firm Characteristics
Const- PRE-
ant SIZE OROS REG
Model 1 0.018 -0.0168 -0.22 0.05
(0.27) (-0.00) (-3.8) *** (3.9) ***
Model 2 0.14 -0.0233 0.044 -0.038
(1.4) (-1.53) (0.518) (-1.97) *
Model 3 -0.24 0.019 -0.079 0.033
(-1.85) (0.94) (-0.665) (1.28)
Model 4 -0.065 0.0005 -0.203 0.0008
(-0.42) (0.018) (-2.31) ** (0.024)
Model 5 0.15 -0.013 0.326 0.0063
(0.62) (-0.32) (2.19) ** (-0.127)
Model 6 -0.056 -0.003 -0.158 0.034
(-0.3) (-0.09) (-1.44) (0.879)
CEO Characteristics
CEO
Tenure Type Duality
Model 1 0.0014 0.0014 -0.004
(1.52) (0.134) (-0.33)
Model 2 -0.002 -0.0055 -0.0004
(-1.69) * (-0.38) (-0.024)
Model 3 0.003 0.0043 -0.015
(1.623) (0.22) (-0.63)
Model 4 0.007 -0.005 -0.03
(3.1) *** (-0.21) (-1.038)
Model 5 0.0039 0.038 -0.013
(1.05) (1.052) (-0.279)
Model 6 0.0012 -0.027 0.0169
(0.403) (-0.95) (0.46)
CEO Characteristics
Age Join Director
Model 1 0.0009 0.0012 -0.002
(0.807) (1.75) * (-1.946) *
Model 2 -0.0003 0.0004 0.0022
(-0.2) (0.446) (1.275)
Model 3 0.0027 -0.0001 -0.0004
(1.257) (-0.08) (-0.163)
Model 4 0.0009 -0.0002 -0.0009
(0.353) (-0.15) (-0.3)
Model 5 -0.005 -0.001 0.004
(-1.18) (-0.42) (0.854)
Model 6 0.002 -0.0006 -0.002
(0.628) (-0.03) (-0.579)
Board of Director Strategic Change
[DELTA]BCOM [DELTA] [DELTA] Adj.
[DELTA]BSIZE P Asset Employ [R.sup.2]
Model 1 -0.03 0.04 0.000008 0.00015 0.287
(-2.2) ** (2.15) ** (0.158) (0.156)
Model 2 0.0163 -0.01 0.000005 -0.002 -0.002
(0.729) (-0.42) (0.648) (-1.66)
Model 3 -0.02 0.0028 0.000003 0.0006 -0.076
(-0.614) (0.09) (-0.088) (0.146)
Model 4 -0.0029 -0.005 0.00002 -0.01 0.319
(-0.09) (-0.11) (1.66) (-4.7) ***
Model 5 -0.0085 0.024 -0.00001 0.0059 0.059
(-0.135) (-0.38) (-0.5) (1.831) *
Model 6 -0.002 0.029 -0.00003 0.008 -0.074
(-0.04) (0.625) (-0.471) (1.398)
*** Indicates statistical significance at the 0.01 level.
** Indicates statistical significance at the 0.05 level.
* Indicates statistical significance at the 0.10 level.
|
|
||||||||||||||||||
Printer friendly
Cite/link
Email
Feedback
Reader Opinion