Working Paper: CEPR ID: DP2949
Authors: Julian Franks; Colin Mayer; Luc Renneboog
Abstract: Economic theory points to five parties active in disciplining management of poorly performing firms: holders of large share blocks, acquirers of new blocks, bidders in take-overs, non-executive directors, and investors during periods of financial distress. This Paper reports the first comparative evaluation of the role of these different parties in the discipline of management. We find that, in the UK, most parties, including holders of substantial share blocks, exert little discipline and that some, for example, inside holders of share blocks and boards dominated by non-executive directors, actually impede it. Bidders replace a high proportion of management of companies acquired in take-overs but do not target poorly performing management. In contrast, during periods of financial constraints prompting distressed rights issues and capital restructuring, investors focus control on poorly performing companies. These results stand in contrast to the US, where there is little evidence of a role for new equity issues but non-executive directors and acquirers of share blocks perform a disciplinary function. The different governance outcomes are attributed to differences in minority investor protection in two countries with supposedly similar common law systems.
Keywords: board turnover; control; corporate governance; regulation; restructuring
JEL Codes: G30
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Regulatory environment (G38) | Influence effectiveness of governance mechanisms (G38) |
| Minority investor protection laws (G38) | Influence management discipline (M54) |
| Large shareholders (G34) | Replace management (Y60) |
| Inside holders of share blocks (G34) | Entrench management (L22) |
| Boards dominated by non-executive directors (G34) | Reduced board turnover (G34) |
| Bidders in takeovers (G34) | High board turnover (G34) |
| Investors during financial distress (G33) | Control poorly performing companies (G34) |