Monitoring Managers: Does It Matter?

  • Author(s): FRANCESCA CORNELLI, ZBIGNIEW KOMINEK, ALEXANDER LJUNGQVIST
  • Published: Mar 07, 2013
  • Pages: 431-481
  • DOI: 10.1111/jofi.12004

ABSTRACT

We study how well‐incentivized boards monitor CEOs and whether monitoring improves performance. Using unique, detailed data on boards’ information sets and decisions for a large sample of private equity–backed firms, we find that gathering information helps boards learn about CEO ability. “Soft” information plays a much larger role than hard data, such as the performance metrics that prior literature focuses on, and helps avoid firing a CEO for bad luck or in response to adverse external shocks. We show that governance reforms increase the effectiveness of board monitoring and establish a causal link between forced CEO turnover and performance improvements.

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