Recent research finds that countries with better developed capital markets
have stronger investor protection (La Porta et al. [1997, 2000a]). This
research argues that the association is because investor protection fosters
good corporate governance that in turn instills investor confidence. Because
an essential role of good corporate governance is to identify and terminate
poorly performing CEOs, one implication of this research is that firms in
countries with strong investor protection are more likely to institute governance
systems that successfully terminate poorly performing CEOs. For
example, extensive investor protection laws give minority shareholders voting
rights that facilitate their ability to replace directors who fail to terminate
unfit CEOs; and strong law enforcement curtails insider expropriation of
shareholder wealth (through mechanisms such as collusive self-dealing),
which in turn reduces directors’ incentives to retain poorly performing
CEOs. Therefore, we hypothesize that CEO turnover is more likely to be
associated with poor firm performance in countries with strong investor
protection, measured as extensive investor protection laws and strong law
enforcement institutions.
Recent research finds that countries with better developed capital markets
have stronger investor protection (La Porta et al. [1997, 2000a]). This
research argues that the association is because investor protection fosters
good corporate governance that in turn instills investor confidence. Because
an essential role of good corporate governance is to identify and terminate
poorly performing CEOs, one implication of this research is that firms in
countries with strong investor protection are more likely to institute governance
systems that successfully terminate poorly performing CEOs. For
example, extensive investor protection laws give minority shareholders voting
rights that facilitate their ability to replace directors who fail to terminate
unfit CEOs; and strong law enforcement curtails insider expropriation of
shareholder wealth (through mechanisms such as collusive self-dealing),
which in turn reduces directors’ incentives to retain poorly performing
CEOs. Therefore, we hypothesize that CEO turnover is more likely to be
associated with poor firm performance in countries with strong investor
protection, measured as extensive investor protection laws and strong law
enforcement institutions.
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