The Value Relevance Of The Forced Departure Of Top Executives In China Listed Corporations

The forced departure of top executives is an important part in the monitoring of a corporation. On theoretical grounds, effective monitoring of top executives should result in positive abnormal returns subsequent to the announcement of their forced departures. The evidence is ambiguous and we analyze three explanations for this ambiguity:(i) Effective monitoring is hidden in stock price effects due to the simultaneous occurrence of the real effect of the announcement and the opposing information effect. (ii)The interrelation between external and internal control prevents assessing the effectiveness of internal monitoring in isolation.(iii) The confounding effect of a simultaneous successor appointment often generates an upward biased estimate. Based on an analysis of trading volumes, we conclude that internal monitoring is effective: forced departures, also without a successor appointment, are value relevant in China where external control mechanisms are virtually absent.