The Turnover-Performance Relation over Time

The specification in Table 4.6 assumes that the relation between performance and turnover likelihood is the same for the entire period 1990-1998. However, there have been many claims that in the presence of global product market competition investors and boards are expecting increasingly superior CEO performance. These claims were investigated by evaluating the impact of firm performance on top management turnover in two sub-samples.

Specifically, the sample was split into two periods; the first one includes sample years 1991, 1992 and 1993 whereas the second one consists of years 1994, 1995, 1996 and 1997. Note that years 1990 and 1998 were excluded from this analysis as they represent a six-month period compared to the rest sample years that denote a full twelve-month period. The aim of this test is to evaluate the time effect on the turnover-performance relation; consequently, only those sample years that are comparable should be included.

Moreover, as shown in Section 4.5.1 the second lags of firm performance - both stock- based and accounting-based - are not significant predictors of the turnover possibility and hence, were excluded from this analysis. Again, size and age were used as control variables whereas specific industry and time effects were incorporated in the model. The results o f this analysis are given in Table 4.9.

As shown, executive turnover is negatively and significantly correlated with both stock- based and accounting-based performance only during the period 1994-1997, suggesting thus that top executives are more likely to leave office nowadays compared with the past. In particular, during 1994-1997 the marginal effect of prior year’s shareholder return in the case of all changes is -0.134 whilst the marginal effect o f accounting earnings is -0.185; estimates are significant at the 1% and 5% level respectively. In contrast, changes in both stock returns and accounting earnings do not affect the turnover possibility in the period 1991-1993.

Moreover, a marginal fall in share prices is associated with a 0.064 increase in the possibility of a non-forced departure during 1994-1997. Results, therefore suggest that managers are more likely to voluntarily depart nowadays compared with yesterday. A plausible explanation could be that as stock options are a significant component of executive compensation (Conyon and Murphy 2000b), CEOs of poorly performing companies choose to leave office and seek for another employer as the value of their total wealth is declining.

Table 4.9: Estimates of Probit Models Relating MSE Turnover to Prior Year's Firm Performance over Time, Time-Period: 1991-1997, Sample: Top 460 London

Stock Exchange Firms

Independent

Variables All changes

Dependent V ariables

Forced changes Non-Forced changes

SHR.9i.93 -0.034 -0.034 0.026 (0.165) (0.009) (0.303) SHR.94.97 -0.134 -0.054 -0.064 (0.000) (0.000) (0.002) EBIT91.93 -0.187 -0.204 0.011 (0.105) (0.001) (0.856) EBIT94.97 -0.185 -0.128 -0.008 (0.019) (0.004) (0.880) SIZE -0.005 0.000 -0.003 (0.221) (0.858) (0.247) AGE 0.004 -0.000 0.004 (0.000) (0.887) (0.000)

Time Effects Yes Yes Yes

Industry Effects Yes Yes Yes

Observations 2334 2332 2332

Pseudo R2 0.060 0.103 0.071

Log Lik. -738.1 -375.6 -496.5

NOTE: p-values in parentheses

The important question, however, is whether top executives are more likely to be dismissed today than in the past. When the dependent variable of the model is forced changes results are mixed. The marginal effect of prior year’s stock returns is more negative in the period 1994-1997 than in 1991-1993 (-0.054 as opposed to -0.034). On the other hand, the marginal effect o f prior year’s accounting earnings is more negative in the period 1991-1993 than in 1994-1997 (-0.204 as opposed to -0.128). In both cases of performance measures, however, the difference between the two effects is not statistically significant; the p-value of the '/^-statistic for the difference in the estimates is 0.250 for stock returns and 0.316 for accounting earnings.

The above evidence combined with the fact that there is no particular time-series pattern in the actual MSE turnover rates by year (as indicated in Table 4.1) suggest that MSEs are not more likely to be dismissed for poor performance. That is the disciplining effect

o f poor performance for this sample of companies and this time period has not become stronger over time. This is consistent with the evidence reported by Huson et al. (2001) and Murphy (1999) for the United States. Based on four six-year sub-periods (i.e. 1971- 1976, 1977-1982, 1983-1988, and 1989-1994), Huson et al. (2001) conclude that the estimated forced turnover-performance relation is stronger in the 1977-1982 sub-period than in either the 1983-1988 or the 1989-1994 sub-period, when performance is measured by accounting returns whilst it does not vary significantly across the different time periods when performance is measured by stock returns. In his analysis, Murphy (1999) shows that in the S&P 500 industrials a negative CEO turnover performance correlation can be established for the period 1980 to 1989. However, for the latter period 1990 to 1995 there is no relationship between CEO turnover and net of market returns.

Finally, it is worth commenting on the robustness of the above findings. Ideally, the two sub-samples in this analysis should include the same number of years. Since, however, in total there are seven comparable years available (i.e. 1991-1997), the split can be either into 1991-1993 and 1994-1997 or 1991-1994 and 1995-1997. The important point is that irrespective of the partitioning strategy the results remain broadly the same. For example, the marginal effect of prior year's accounting returns on the possibility of a forced turnover (that is of greater importance as opposed to all changes or non-forced changes) is more negative during 1991-1994 than in 1995-1997. In contrast, a marginal decrease in prior year's stock returns has almost the same impact on forced turnover during both periods (marginal effects are -0.43 in 1991-1995 and -0.35 over 1995- 1997). Under both performance metrics, however, the difference between the two effects is not statistically significant; the p-value of the ^-statistic for the difference in

the estimates is 0.650 for stock returns and 0.530 for accounting earnings. This in turn reinforces the main conclusion that the disciplining effect of top executives has not strengthened over the time.