the functioningof governance mechanisms during the process of top executive successionin U.S. corporations has received considerable attention, there is littledirect evidence for Japanese corporations. Using data on 270 Japanese firms inMoody’s International Reports from 1985 to 1990, we examine the effect of main
banks, blockholders, keiretsu groups, and outside directors on the relationbetween top executive turnover and firm performance.
Our analysis focuses on nonroutine turnover and outside succession becausethey are likely to constitute disciplinary events. Consistent with evidence from
U.S. data,2 we find a negative relation between nonroutine top executive
turnover likelihood and firm performance. In addition, firms with ties to a mainbank are more likely to remove top executives for poor earnings performancethan are firms without a main bank. We also find some evidence of a marginallystronger relation between stock-price performance and nonroutine turnover forfirms with high levels of block ownership. However, keiretsu membership or thepresence of outside directors on the board has no effect on the sensitivity of
turnover to either earnings or stock-price performance. Main banks and largeshareholders also play an important role in the likelihood that a new topexecutive will be appointed from outside the firm. Conditional on turnover, wefind that a successor is more likely to be appointed from outside the firm when‘See Jensen and Warner (1988) and Black (1992) for a review of this literature.‘See for example, Coughlan and Schmidt (198% Warner, Watts, and Wruck (1988), Weisbach
(1988), Jensen and Murphy (1990), Gibbons and Murphy (1990), Gilson (1990), Murphy andZimmerman (1993), and Blackwell, Brickley, and Weisbach (1994). Kaplan (1994) documents that
management turnover in German corporations also increases with poor firm performance.J.-K. Kang, A. ShivdasaniJJournal of Financial Economics 38 (1995) 29-58 31
ownership by the top ten shareholders is high or there exists a main
bank relation. It is less likely for firms with keiretsu membership. Takentogether, these results suggest that mechanisms such as the main bank systemand concentrated equity ownership perform an important governance role inJapan.
Finally, we examine changes in firm performance around top executive
turnover. We document statistically significant improvements in firm performanceafter nonroutine turnover and outside succession. These results furtherindicate the characterization of such turnover in Japanese corporations asdisciplinary events that result in improved operating performance. In contrast,
routine turnover events do not result in significant post-turnover performance
improvements.
Our paper is related to two recent studies on top executive turnover in Japan.Kaplan (1994) examines the relation between firm performance and managementturnover for 119 Japanese corporations listed in the Fortune International500 during 1980-88. He predicts turnover of presidents, representative directors,and all directors on the board, using stock returns, sales growth, income levelsand changes, and earnings losses as performance measures. Controlling for theage and tenure of the president, he finds that turnover likelihood is significantly
and negatively related to stock returns, income levels, and earnings. Kaplan(1994) also documents a positive relation between changes in director compensationand firm performance. His resu
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