Successor Is
Insider
Successor Is Outsider
Forced
CEO
turnover
Increase in
likelihood of
change but no
immediate policy
Most likely to change
management policy and to
increase likelihood of future
change in management change
A forced CEO change increases the likelihood of
managementchangeinthefuturebecauseitsuggeststhatthe
board of directors will actively challenge management.
Choosinganoutsiderasareplacementismorelikelytolead
to a changein current management policies. Theexpected
valueofcontrol,whichistheproductofthetwo,islikelyto
beincreasedthemostwhenanexistingCEOisforcedoutand
an outsider is hired.
Corporate Governance
Gompers, Ishi, and Metrick (2003) studied the effect of
corporate governance on stock prices by developing a
corporate poor governance index,based on 24 factors, for
1,500firms;higherscoresontheindextranslatedintoweaker
corporate governance.
47 Theyfoundthatthestockswiththeweakeststockholder
powerearned8.4percentlessinannualreturnsthanstocks
withthestrongeststockholderpower.Theyalsofoundthatan
increaseof 1 percentinthepoorgovernanceindextranslated
intoadeclineof2.4percentinthefirm’sTobin’sQ,whichis
theratioofmarketvaluetoreplacementcost.Thefactthat
poor corporate governance is correlated with poor stock
returns and lower stock prices is by itself not conclusive
evidencethatthereisanexpectedvalueofcontrolbuiltinto