A study of the relationship between changes in the corporate governance mechanism, CEO turnover, and performance in declining firms

Using longitudinal data spanning the 1978-1995 fiscal years, this study examines the relationship between corporate governance and performance in financially distressed companies. Working under the auspices of agency theory assumption that decline is a situation where deteriorating performance exemplifies the deviation in managerial efforts to satisfy the shareholders' interests, the first research question focuses on the influence of declining performance on changes in the corporate governance mechanism. The second research question examines the influence of the changed corporate governance mechanism on subsequent performance. This study further incorporates ownership context in which the remedial decisions are made.; The study finds strong support for the general proposition that the corporate governance mechanism becomes more vigilant during time of decline in performance. Specifically, during the period of financial distress, there is an increase in the proportion of outside directors, the size of the board, outside directors' ownership, and the number of board meetings for both manager-controlled and owner-controlled companies. This study finds that the type of ownership does not affect the changes in corporate governance mechanism during decline in firm performance.; It is found that not all components of the changes in the corporate governance mechanism are positively related to subsequent performance. Evidence from these results suggests that the relationship between CEO turnover, increase in the proportion of outside directors, increase in the shareholdings of outside directors and removal of CEO duality and subsequent performance is not significant. Increased number of board meetings and increased board size are positively related to subsequent firm performance. Additionally, it is found that type of ownership moderates the relationship between these two variables and subsequent performance.; In discussing these results, a number of possible explanations are discussed and suggestions regarding research avenues are offered.