This study examines marathon successions, which I define as instances where a permanent successor is not chosen at the time of a CEO departure. Marathons have become increasingly prevalent over the last ten years and represent the majority of succession decisions surrounding forced turnovers from 1995-2005. Firms implementing marathon successions around forced turnovers have strong internal governance structures, as measured by board size, director ownership, percentage of outside directors, and dual Chairman/CEO appointments. In addition, I find little evidence supporting the argument that extending the succession process through the use of a marathon leads to increases in uncertainty and/or agency costs in the form of horizon problems. Lastly, I find positive and significant announcement returns for forced marathon successions. These results provide insight into the succession process and the role of strong internal corporate governance in evaluating and implementing succession decisions.

Thesis advisor: Fabio Schiantarelli / Thesis advisor: Thomas J. Chemmanur / After the 2007 financial crisis, a big attention has been dedicated to credit ratings. Whether ratings are capable to provide the most precise and timely information is a question that has been tackled from different angles. The possibility to discipline credit ratings via a regulatory mechanism, the influence that ratings may play on corporate governance decisions and the information they deliver in comparison to other financial intermediaries are the main points that this dissertation aims to address. The first paper compares the behavior of standard or issuer-paid rating agencies, represented by Standard & Poors (S&P) to alternative or investor-paid rating agencies, represented by the Egan-Jones Ratings Company (EJR) after the Dodd- Frank Act regulation is approved. Results show that both S&P and EJR ratings are more conservative, stable and, on average, lower after the Dodd-Frank implementation. However, EJR ratings are higher for firms that may generate high revenue for the rater. Additionally, I find that, after the regulation, S&P cares more about its reputation. Exploiting a measure that captures the bond marketís ability to anticipate rating downgrades, I show that, after Dodd-Frank, bond market anticipation decreases for S&P but increases for EJR, suggesting that S&P ratings are timelier. Finally, I study how the bond market responds to rating changes and how firms perceive ratings in their decision to issue debt in the post-Dodd-Frank period. Results suggest that both S&P downgrades and upgrades generate a greater bond market re- sponse. On the contrary, only EJR upgrades have a magnified effect on bond market returns. The greater informativeness of S&P ratings after Dodd-Frank is confirmed by the meaningful impact of these ratings on firm debt issuance. The second paper (coauthored with Annamaria C. Menichini) studies the relationship between credit rating changes and CEO turnover beyond firm performance. Using an adverse selection model that explicitly incorporates rating change related turnover, our model predicts that a downgrade triggers turnover, more so the lower the managerial entrenchment, but that this relation is weaker when the report provided by the rating agency is more reliable. Our empirical results support these predictions. We show that downgrades explain forced turnover risk, with the new CEO chosen outside the firm that has received the negative credit rating change. In addition, we find that the relation between rating changes and management turnover is stronger when the degree of managerial entrenchment is low, for firms characterized by a high level of investment and for firms less exposed to rating fees. Finally, we show that this relation has weakened in the post-2007 crisis period, in coincidence with the increased reputational concerns of the rating agencies. The results are robust to endogeneity concerns. The third paper (coauthored with Thomas J. Chemmanur and Igor Karagodsky) focuses on equity analysts, issuer-paid and investor-paid ratings. Equity analysts' forecasts and ratings assigned by issuer-paid credit rating agencies such as Standard and Poorís (S&P) and by investor-paid rating agencies such as Egan and Jones (EJR) all involve information production about the same underlying set of firms, even though equity analysts focus on cash flows to equity and bond ratings focus on cash flows to bonds. Further, the two types of credit rating agencies differ in their incentives to produce and report accurate information signals. Given this setting, we empirically analyze the timeliness and accuracy of the information signals provided by each of the above three types of financial intermediary to their investor clienteles and the information flows between these intermediaries. We find that the information signals produced by EJR are the most timely (on average), and seem to anticipate the information signals produced by equity analysts as well as by S&P. We find that changes in leverage are associated with lower EJR ratings but higher equity analysts' recommendations; further, credit rating changes by EJR have the largest impact on firms' investment levels. We also document an investor attention effect (in the sense of Merton, 1987) among stock and bond market investors in the sense that changes in equity analyst recommendations have a higher impact than either EJR or S&P ratings changes on the excess returns on firm equity, while EJR rating changes have a higher impact on bond yield spreads than either S&P ratings changes or changes in equity analyst recommendations. Finally, we analyze differences in bond ratings assigned to a given firm by EJR and S&P, and find that these differences are positively related to the standard proxies for disagreement among stock market investors.

I investigate the role of organizational form and ownership structure in corporate governance by examining CEO turnover decision in the property-casualty insurance industry. The likelihoods of turnover and non-routine turnover are significantly and negatively associated to firm performance, and the outside succession dominates when non-routine turnover occurs. Further, the firm's magnitude of turnover-performance sensitivity depends on its quality of the corporate governance mechanisms which are determined by organizational form and ownership structure. The sensitivity of non-routine turnover to firm performance is lower in mutuals than publicly held non-family firms. Non-family-member CEOs in publicly listed family firms have the highest likelihoods of turnover and performance-turnover sensitivity among all types of companies. Manager-owned stock insurance companies have the lowest turnover rate and sensitivity of non-routine turnover to firm performance. Also incoming successors mainly come from the controlling family no matter what the turnover type is. / Business Administration/Risk Management and Insurance

This thesis analyses several aspects of institutional investor influence in the corporate governance of UK firms. Chapter 1 introduces the thesis, and Chapter 2 provides a literature survey. The main original empirical research findings are presented in Chapters 3 to 5.Chapter 3 explores the key firm characteristics related to institutional investors. We show that institutional shareholdings, particularly those institutions with a large shareholding, are positively related to the proportion of outside directors on the board; with stock returns and with volatility. Institutional shareholdings are negatively related to the shareholdings of inside directors and firm size. Interestingly institutional shareholdings are positively related to CEO age but negatively related to the number of CEO’s years in office. This seems contradictory but it is consistent with institutional investors wanting experienced CEOs but not those individuals who have become entrenched. None of the measures proxying for the Cadbury recommendations for board structure, such as number or proportion of non-executive directors, CEO duality, or outside chair, has a significant relationship with institutional shareholdings. Chapter 4 analyses the relationship between institutional shareholdings and CEO cash-based remuneration. Uniquely to this field of research we also consider the different elements of remuneration separately to account for the timing differences relating to their award and performance criteria. First, we find that the presence of a large institutional shareholding, or high concentration of institutional shareholdings, does significantly reduce the magnitudes of salary and bonuses but they do not reduce the magnitude of benefits. However, the presence of an institutional investor, regardless of the size of their shareholding, has no relationship with the magnitude of any of the remuneration variables. Second, we find that institutional shareholdings significantly increases the positive relationship between bonus remuneration and firm performance, but that they do not have such a noticeable effect on the relationship between salary and benefits and firm performance. Third, we find that the presence of a large institutional shareholding, or high concentration of institutional shareholdings, reduces the rates of increase in salary, benefits and bonuses. Fourth, we find that the past practice of modelling salary and bonuses together can produce misleading results. We suggest that salary and bonuses should be modelled separately because they are payments for different reasons and relate to different periods of firm performance. Chapter 5 explores the influence that institutional investors have over CEO turnover. We show that the likelihood of a CEO being forced from office is negative and significantly related to firm performance and positive and significantly related to the presence of a large institutional shareholding or high concentration of institutional shareholdings. The findings in this thesis are robust to variations in research design. The conclusions are that the internal control mechanisms do work, that institutional investors are not the ‘passive’ investors often portrayed by some practitioners and early academic research and that institutional investors go to some lengths to ensure that their investee firms are properly governed.

Chief Executive Offier (CEO) characteristics, such as the level of risk aversion, are known to affect corporate financial policies, and therefore are likely to impact corporate liquidity decisions. We examine changes in cash holdings around CEO turnover events, a period in which discrete changes in managerial preferences and abilities are likely to have the most dramatic effect on cash holdings. Our results suggest that cash holdings increase significantly following forced departures. The increase is persistent over the successor's tenure and is robust to controls for the standard firm-level determinants of cash holdings and corporate governance characteristics. We find that higher cash holdings arise mainly through the management of net working capital, as opposed to asset sales or reductions in investment. This suggests that the changes are optimal for shareholders rather than an indication of serious agency problems. This conclusion is supported further by our finding that the marginal value of cash does not decrease following the turnover.

This thesis researches to which extent companies use earnings management in times of CEO turnover, which is a continuing, complex and rather complicated issue. Earnings management was tested on different attribute such as: firm industry, firm size, CEO’s age, and the CEO’s origin (internal or external). The data was gathered through a quantitative study based on public companies’ financial reports. The sample includes 252 firms listed on Nasdaq OMX Stockholm and have been subject of a CEO change at some occasion during 2005-2011. The statistical result from the mixed-model ANOVA tests showed in general significant result of upward earnings management the year of CEO change, but not the following year. While there are many explanations to the findings of how earnings management is used on the Swedish market, the analysis and conclusion elaborate the reason that ought to be the blueprint of reality.

This paper examines the impact of CEO turnover from an internal capital allocation perspective. We test whether new CEOs make different divisional investment decisions than their predecessors, and if yes, how would this difference affect firm performance. We find that segment investments respond to factors, such as segment investment opportunity, segment cash flow, and other segments’ cash flows, differently after CEO turnover. Evidence also indicates that new CEOs adjust the segments’ previous over-investment /under-investment status to match industry average investment level, and they adjust the relative investment preference among divisions. These findings support the argument that different CEOs have their own set of skills and incentives, which directly affect their internal capital allocation decisions after they take over the office. We also examine the affiliation relationship between certain divisions and new CEOs, and find that new CEOs do not make capital allocation in favor their affiliated divisions. Furthermore, the analyses on firm-level internal capital allocation sensitivity do not support the literature about positive relationship between firm performance and the “Q-sensitivity”. But, our analyses do find a positive and robust relationship between changes in firm performance and changes in the “cash flow-sensitivity”. This suggests that new CEOs making internal capital allocation in favor of their “cash cow” segments are more likely to improve firm performance after CEO turnover.

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Abstract 1: In this paper, we investigate the effects of internal corporate governance on the length it takes to remove a CEO after the initial sign of poor firm performance. We find that firms that have a better quality of internal corporate governance are quicker to remove poor-performing CEOs. This result persists after controlling for other factors that might influence the CEO removal decision. Abstract 2: Employing a sample of voluntary CEO turnovers selected from S&P 500 firms over the period 2004-2009, I investigate the impact prior firm performance on a CEO’s potential of being hired on an equivalent job in a similar company. I find that the better the performance of the previous firm, the quicker is CEO being hired. In other words, the better the previous firm performance, the better is the CEO’s potential to a land a similar job faster. The result prevails even in the presence of control variables, such as the CEO’s education, tenure, age and gender. The better performers in previous firms also seem to yield greater improvement in performance of their new employers.

This dissertation is a series of study on CEO turnover, succession, and compensation, which consists of three essays. In essay 1, I investigate how the Sarbanes-Oxley Act (SOX) affects CEO tenure and the characteristics of CEO turnover. I do not find a significant relation between financial reporting and CEO turnover even though SOX enforces accurate financial reporting and personal responsibilities. However, I find SOX affects CEO turnover via the changes to corporate boards. I provide some evidence supporting the idea that intensified monitoring significantly reduces CEO tenure. Specifically, I find SOX significantly affects the relation between CEO tenure and the independence of the board. I find that the likelihood of forced CEO turnover is higher in the post-SOX period. I also document that intensified monitoring increases the likelihood of forced turnover, specifically, I find CEO power concentration, institutional ownership, negative news, and shareholder governance proposals significantly affect the odds of forced turnover. I also provide some evidence supporting the hypothesis that firm performance is inversely related to forced CEO turnover. I document that the average number of audit committee meetings significantly increased in the post-SOX period, and the interaction between the number of audit committee meetings and firm performance significantly increase the likelihood of forced CEO turnover. Overall, the results support the notion that SOX affects boards' decisions on CEO turnover. I do not find that the proportion of outside directors significantly affects the odds ratio of forced turnover, indicating outside dominated boards may not be effective in removing CEOs. Managerial discretion defines the working environment of a manager and could potentially affect a board's choice of a successor CEO. In essay 2, I hypothesize that boards tend to appoint younger (older) CEOs in firms with high (low) managerial discretion. I further propose that the relation between managerial discretion and successor CEO age may be moderated by the age of board members, the origin of the successor, and the successor's designated heir status. Using a sample of 629 successions occurring between 1994 and 2005, I find empirical evidence that supports my first hypothesis for the total sample and the sample of successions with voluntary turnover. Board age, successor origin, and the successor's designated heir status do not moderate the results for the total sample. However, I find that board member age and designated heir status moderate the relation between managerial discretion and CEO age following forced turnover. Following voluntary turnover, successor origin and designated heir status moderate the result. The above mentioned three board and CEO characteristics may either strengthen or weaken the link between managerial discretion and CEO age depending on how the incumbent CEO leaves the CEO position. In addition, several other factors also statistically affect boards' decisions regarding CEO age, including governance, CEO board tenure, and titles held by the successor. In essay 3, I examine the role of managerial discretion in setting CEO pay at succession. Using a sample of 656 successions from 1994-2005, I provide evidence that a successor CEO's pay level is positively and significantly associated with the level of managerial discretion. However, outside succession moderates the link between managerial discretion and pay level. I further find that the moderating effect of a successor's origin is contingent upon the bargaining power of the board of directors for the total and forced turnover samples. As for the pay structure of a successor, the results of the total sample and forced turnover subsample provide evidence that managerial discretion positively relates to the proportion of risk-based pay and outside succession has a moderating effect on this relation; and the moderating effect depends on the board bargaining power. As for the voluntary turnover sample, the pay structure of the new CEO is mainly determined by the pay structure of the predecessor, firm performance, and the board bargaining power. This study enriches existing research on managerial discretion and succession by linking CEO bargaining power at succession with the theory of managerial discretion.