internal monitoring mechanisms and ceo turnover a long-term.pdf

THE JOURNAL OF FINANCE • VOL. LVI, NO. 6 • DEC. 2001 Internal Monitoring Mechanisms and CEO Turnover: A Long-Term Perspective MARK R. HUSON, ROBERT PARRINO, and LAURA T. STARKS* ABSTRACT We report evidence on chief executive officer CEO turnover during the 1971 to 1994 period. We find that the nature of CEO turnover activity has changed over time. The frequencies of forced CEO turnover and outside succession both in- creased. However, the relation between the likelihood of forced CEO turnover and firm performance did not change significantly from the beginning to the end of the period we examine, despite substantial changes in internal governance mecha- nisms. The evidence also indicates that changes in the intensity of the takeover market are not associated with changes in the sensitivity of CEO turnover to firm performance. STOCKHOLDERS RELY ON INTERNAL AND EXTERNAL monitoring mechanisms to help resolve agency problems that arise from the separation of ownership and control in modern corporations. Boards of directors and blockholders are im- portant internal control mechanisms whereas the takeover market is a ma- jor source of external control. Both academicians and practitioners have speculated that improvements in corporate governance structures would en- hance the internal control mechanisms. For example, Jensen 1993 argues that the corporate governance structures of LBO associations and venture capital funds should be models for corporations that desire more efficient control systems. Among the desirable features Jensen points to are smaller, outsider-dominated boards, and substantial equity ownership by managers and board members. Similarly, Blair 1995 discusses