CEO Turnover: Governance Mechanisms, Company Performance and Restructuring in the U.K. and Germany

5 1. Introduction CEO removals are considered crucial events in order to understand those governance mechanisms which discipline managers, avoiding deviation from value-maximizing corporate policies (Jensen and Warner (1988)). If all economic systems face the same principal-agent problem, CEO changes should also represent important disciplinary forces for different countries. This thesis focuses on CEO changes, providing an analysis of differences in governance mechanisms, company performance and corporate restructuring activities in the U.K. and Germany. Early studies on managerial turnover by Coughlan and Schmidt (1985), Warner, Watts and Wruck (1988), Weisbach (1988) and Jensen and Murphy (1990) suggest turnover being negatively related to past performance. More recently, Kaplan (1994b), Renneboog (2000), Franks, Mayer, and Renneboog (2001), Volpin (2002) and Maury (2006) confirm this evidence. However, most of the reference literature on CEO turnover has focused on single-country studies with the only exception of Kaplan (1994a) 1 . The main contribution of this thesis is to search for cross-country evidence of the causes and effects of CEO changes. In detail, I examine whether negative past performance increases the likelihood of CEO turnover in both countries. I investigate which governance mechanisms influence managerial turnover under different governance regimes, and if their influence increases for underperforming firms. Moreover, I search for cross-country evidence in terms of post-turnover performance reversals and corporate restructuring. I have taken the U.K. and Germany since they represent two opposite legal and economic systems, displaying vast differences in matters such as investor protection, financial 1 Kaplan (1994a) analyses corporations from the U.S. and Japan and finds that negative past performance increases the likelihood of CEO turnover in a similar way in both countries.