CEO turnover: Cross‐country effects

Abstract

Abstract Research Question/Issue We examine how countries' cultural and legal environment, in addition to firm‐level governance mechanisms, affects firms' retention and termination decision of the CEO. Research Findings/Insights Previous research focuses primarily on the effects of governance structures and incentives on turnover. In this paper, we focus on two additional institutions—cultural and legal. We find that in cultures characterized by higher individualism, competition, and stronger views that hard work leads to success, boards are more likely to replace CEOs in response to poor shareholder performance. Conversely, we find that in more corrupt cultures and cultures more protective of employees, there is lower turnover–performance sensitivity. Theoretical/Academic Implications Williamson (2000) provided a framework consisting of four levels of institutional influences on economic activity: (1) cultural norms, (2) the legal system, (3) governance structures, and (4) resource allocation and employment. Previous research focuses primarily on the two highest levels; we focus on the two more basic levels, cultural and legal, while controlling for firm‐level governance. Practitioner/Policy Implications Cultural values and legal conditions combine with the firm's governance structure to affect CEO turnover and its sensitivity to firm shareholder performance.

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