Mark L. DeFond
University of Southern California
Mingyi Hung
University of Southern California
Abstract: Recent research asserts that an essential feature of good corporate governance is strong investor protection, where investor protection is defined as both (1) the extent of the laws that protect investorsÂ’ rights and (2) the strength of the legal institutions that facilitate law enforcement. The purpose of this study is to test whether the two components of investor protection are associated with an important role of good corporate governance: identifying and terminating poorly performing CEOs. Our findings indicate that strong law enforcement institutions significantly improve the association between CEO turnover and poor performance, while extensive investor protection laws do not. In addition, we find that in countries with strong law enforcement, CEO turnover is associated with poor stock returns when stock prices are more informative, and with poor earnings otherwise. Overall, these findings suggest that good corporate governance requires law enforcement institutions capable of protecting shareholdersÂ’ property rights (i.e. protecting shareholders from expropriation by insiders).
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