Monitoring managers: does it matter?

Cornelli, F, Kominek, Z and Ljungqvist, A (2013) Monitoring managers: does it matter? Journal of Finance, 68 (2). pp. 431-481. ISSN 0022-1082

Abstract

We study how well‐incentivized boards monitor CEOs and whether monitoring improves performance. Using unique, detailed data on boards' information sets and decisions for a large sample of private equity–backed firms, we find that gathering information helps boards learn about CEO ability. “Soft” information plays a much larger role than hard data, such as the performance metrics that prior literature focuses on, and helps avoid firing a CEO for bad luck or in response to adverse external shocks. We show that governance reforms increase the effectiveness of board monitoring and establish a causal link between forced CEO turnover and performance improvements.