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Journal of Banking & Finance 27 (2003) 10271051

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CEO turnover in insider-dominated boards:


The Italian case
Giorgio Brunello a, Clara Graziano
a
b

b,*

, Bruno M. Parigi

Department of Economics, University of Padua, Via del Santo 33, 35123 Padua, Italy
Department of Economics, University of Udine, Via Tomadini 30/a, 33100 Udine, Italy
Received 2 October 2000; accepted 8 January 2002

Abstract
We investigate CEO turnover in relationship to performance, ownership concentration and
CEO ownership in a sample of 60 private companies listed on the Italian Stock Exchanges over
the 9-year period 19881996. Concentrated ownership, family control, limited institutional investors activism, and lack of main bank monitoring make Italy a corporate governance environment dominated by insiders. As a result, boards of directors are dominated by insiders
and/or represent the interests of the controlling shareholders. Our main nding is that CEO
turnover is negatively related to rm performance also in this environment, but this relationship
holds only if the controlling shareholder is not the CEO. Our ndings suggest that insiders with
large stakes monitor and replace under-performing outside CEOs. The paper oers positive empirical evidence that non-CEO controlling shareholders are a governance mechanism that provides a substitute for outside members on boards of directors in lowering agency costs. When
the CEO is an owner, however, we have all the negative aspects of insider-dominated boards.
2003 Elsevier Science B.V. All rights reserved.
JEL classication: G34; J63
Keywords: CEO turnover; Corporate governance

1. Introduction
CEO turnover is an important ingredient of corporate governance. Italy is an interesting example of CEO turnover because of its corporate governance environment
largely dominated by insiders: Company ownership is concentrated in the hands of
*

Corresponding author. Tel.: +39-432-249216; fax: +39-432-249229/512529.


E-mail address: clara.graziano@dse.uniud.it (C. Graziano).

0378-4266/03/$ - see front matter 2003 Elsevier Science B.V. All rights reserved.
doi:10.1016/S0378-4266(02)00244-3

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families, families take active part in management, and there is marked separation of
control and cash ow rights. These factors are not mitigated by an active external
market for corporate control because of limited rm contestability through hostile
takeovers, underdeveloped capital markets, weak institutional investor activism, and
the absence of main bank relationships.
The object of this study is an investigation of CEO turnover when insiders run the
boards. We perform an econometric analysis of CEO turnover in relationship to performance, ownership concentration and CEO ownership using a sample of companies listed on the Italian Stock Exchanges over the 9-year period 19881996. We
investigate whether there is a negative relationship between CEO turnover and rm
performance as most of the literature documents, and whether and how turnover is
aected by ownership concentration and by the CEO being a controlling shareholder.
To preview our main results we nd that:
i(i) CEO turnover is negatively related to rm performance;
(ii) the turnover performance relationship is signicant when the CEO is not a controlling shareholder, and it is absent altogether when the CEO is a controlling
shareholder.
The nding of a negative relationship between turnover and performance can be
interpreted as evidence that large blockholders do not remain passive but exercise
monitoring. Moreover, the signicant relationship between turnover and performance when the CEO is not a controlling shareholder is an indication of monitoring
of outside managers by the largest shareholder(s). On the other hand, the absence
of any turnoverperformance relationship when the CEO is an owner points to the
high benets of control that lead to entrenchment.
The main implication for the corporate governance literature is that when insiders
dominate boards of directors, potentially making the boards tools in the hands of
managers we do not have necessarily a failure of corporate governance. Financial
markets evolve to substitute governance mechanisms that put a check on agency
costs. The paper oers positive empirical evidence that non-CEO controlling shareholders are a governance mechanism that provides a substitute for outside members
on boards of directors. Interestingly, the turnover performance relationship in our
study is stronger than that found for the US by Denis et al. (1997) and Weisbach
(1988). Thus, insider boards are not necessarily bad per se, and do not necessarily
lead to higher agency costs. On the contrary, having insiders on the board when
the CEO is not a controlling shareholder may actually be a positive complement
to the strategy of having large blockholders.
We measure the eectiveness of governance with CEO turnover measures. An important and closely related issue is whether rms that changed the CEO improved
their performance. Unfortunately the quality of our data does not allow us to pursue
this line of research in this paper.
The rest of the paper is organized as follows. Section 2 discusses the institutional
aspects of Italian capitalism and the main features of boards of directors in Italy.

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Section 3 describes the sample data and reports some descriptive statistics on ownership structure and CEO turnover. Section 4 describes the empirical strategy. The
results of the regressions are presented in Section 5. Section 6 summarizes our ndings and indicates possible extensions.

2. Institutional background
2.1. Corporate governance in Italy
CEO turnover is better understood in the context of the Italian system of corporate governance. This system is generally regarded as a poorly functioning one
because of the weak legal protection of small shareholders (see, for example, La Porta
et al., 1999), the underdeveloped capital markets, and the limited monitoring role of
banks.
These factors oer ample possibilities of expropriation of small shareholders
through a number of schemes such as pyramids and cross-ownership (see Bebchuk
et al. (1999), for a theoretical model). In Italy, companies typically belong to groups
(i.e. they have a common controlling shareholder) which are often organized as pyramids with a holding company at the top controlling one or more subsidiaries (see
Brioschi et al. (1990), for an analysis of pyramidal groups in Italy). Hierarchical
group control accounts for over 57% (32.6%) of manufacturing companies of more
(less) than 200 employees (Bianco et al., 1996). The holding company is often controlled through cross shareholding with allied groups.
Pyramids and cross-ownership ties produce a marked separation of control rights
from cash ow rights. As a result, the benets of control are larger than elsewhere;
for example, stocks enjoy an abnormally high voting premium. Zingales (1994) reports an 82% premium associated with the voting rights of stocks of companies listed
on the Milan Stock Exchange against a voting premium of between 10% and 20%
common in other countries.
The literature predicts that under these circumstances a partial alleviation of the
agency conicts between controlling and non-controlling shareholders may come from
concentrated ownership (see, for example, Shleifer and Vishny, 1986, 1997). Indeed a
distinctive feature of the listed rms in Italy is a strong ownership concentration. Leaving the detailed description of our sample of rms to Section 3, we anticipate here that
the largest shareholder owns on average more than 50% of common shares. The median value of largest shareholding is above 50%, which indicates that in more than half
of listed rms one shareholder owns the absolute majority of common shares. Similar
ndings hold for other samples of large and medium-sized companies. In 1996 the largest shareholder and the largest three shareholders owned 48% and 62% of the shares,
respectively (Bianco and Casavola, 1999). In the 123 private companies continuously
listed in the 19902000 period, the average share of the largest shareholder remained
almost unchanged at slightly less than 50% (CONSOB, 2001).
For a number of reasons large independent shareholders and institutional investors play only a minor role in monitoring the controlling shareholder in this context.

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First, as Shleifer and Vishny (1997) point out, large minority shareholders may be
eective only in countries with relatively sophisticated legal systems. Second, in all
top 20 Italian companies by stock market capitalization in 1995 there was no second
largest shareholder with at least 10% of the shares (La Porta et al., 1999). In our sample the average percentage of shares held by the second largest shareholder is
between 8% and 10%. Third, institutional investors hold a small fraction of the
equity of Italian rms. In 1997 mutual funds owned 6% of the stocks in the Milan
Stock Exchange capitalization, insurance companies 5%, pension funds 0.5% and
stock brokers 0.2% (Banca dItalia, 1998). In general, institutional investors are
not active investors (Bianchi and Enriques, 1999).
Although the above features make the Italian system more similar to the German
and Japanese models than to the Anglo-Saxon model, it diers signicantly from
these models too. In the relationship-based systems, banks monitor insiders and replace the missing external markets for corporate control. However, bank governance
in Italy has been ineective for various reasons: State ownership of banks, the practice of multiple loans, the reliance on good collateral as the main criterion to grant
credit, and, unlike their German counterparts (Franks and Mayer, 1998), the legal
prohibition for banks to vote for the shares in custody or to solicit proxy votes
(Art. 2372 of the Civil Code, hereafter c.c.).
2.2. Insider-dominated boards
Concentrated ownership, the absence of large independent shareholders, and limited bank monitoring have a number of implications both for the composition and
for the functions of the boards of directors.
First, directors mainly represent the interests of the controlling shareholders, despite the fact that the law explicitly addresses the conicts of interests (Art. 1710,
2390, 2391 c.c.) and states that directors must act with due diligence in the interests
of all shareholders (Art. 2392 c.c.). A survey conducted in 1994 (Crisci and Tarizzo,
1995) on the boards of directors of 500 Italian companies provides a clear picture. To
the question Who do you represent in the board?, 83% of the directors answered
the controlling shareholders and only 12% the minority shareholders.
Second, outside directors are rare, and insiders and aliated outsiders dominate
boards. Crisci and Tarizzo (1995) report that more than 70% of directors are executives and that in most instances directors had previous strong ties with the rm: In
64% of the cases directors were chosen from former managers or consultants of the
rm (the so-called gray directors or aliated outsiders), in 26% of the cases from
either shareholders or their relatives, and only in 6% of the cases did the director
have no previous relationship with the rm. The same survey reports that the choice
of a new director is based more on personal contacts than on the search for the best
candidate. These data contrast with those on US boards where the average proportion of outside directors ranges from 40% (Denis and Sarin, 1999) to 64% (Kaplan,
1994a). However, Denis and Denis (1994) nd that US rms controlled by majority
owner-managers have a lower fraction of outsiders on their boards, and Denis and
Sarin (1999) show that there is a negative correlation between the presence of the

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company founder in the top management and the fraction of outside directors.
Board composition matters because it has been shown that is a determinant of the
intensity with which the board monitors the CEO and of its choice of the best candidate: Outsider-dominated boards are more likely to re an underperforming CEO
(see, for example, Weisbach, 1988) and to appoint an outside CEO (Borokhovich
et al., 1996).
Board members in Italy are generally appointed by the shareholders meeting for a
three-year renewable term, and can be removed by the shareholders meeting in any
moment (Art. 2383 c.c.). However, the shareholders meeting often simply raties the
selection made by the top management which, given the concentrated ownership,
amounts to the controlling shareholders picking the boards. Typically there is no
mandatory retirement age. The board of directors appoints the CEO. The chairman
of the board is elected either by the board or by the shareholders (Art. 2380 c.c.).
Third, the large controlling shareholders, or their representatives, are often actively involved in company management (Barca, 1996; La Porta et al., 1999). This
pattern is hardly an exception worldwide where, according to La Porta et al.
(1999), 69% of the families that control the largest rms also participate in management. As La Porta et al. (1999) report, in all the top 20 Italian rms by stock market
capitalization a member of the controlling family is on the board as Chairman, CEO,
Honorary Chairman, or Vice-Chairman of the rm controlled by the family. Similarly, anticipating the description of some of our data, in our sample more than
one quarter (26%) of CEOs is a controlling shareholder or a member of the controlling family. As a result, the task of the board is also strategic planning and its implementation, besides the monitoring of executives.
Finally, an additional reason for weak independent monitoring by the board is the
ineectiveness of the Internal Auditing Committee (Collegio Sindacale). Although
the law assigns independent monitoring to this committee, it is appointed by the
shareholders meeting and thus by the same majority of votes that appoints the directors it is supposed to control. Therefore the Internal Auditing Committee has limited
independence, its role is often only to certify the formal compliance of the directors
decisions with the law, and experience shows that it can prevent only some of the
most egregious violations of the board (Stanghellini, 1999). Furthermore, until the
1998 reform of Italian corporate law, the possibility for minority shareholders to
sue the directors was subject to the approval of the shareholders meeting (Art.
2393 c.c.), and thus it was ultimately in the hands of the controlling shareholders
themselves.

2.3. Implications for CEO turnover


To summarize, in this corporate governance environment with large private benets of control and concentrated ownership, boards are instruments in the hands of
the large controlling shareholders. This feature is also shared by the boards in our
study although, as will be made clear later, lack of suitable information prevents
us from capturing it with an explanatory variable.

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The fact that large shareholders control the boards in our sample leads to opposite predictions on the intensity of the monitoring activity of the board. On the one
hand, as the empirical evidence on the US suggests, turnover and turnoverperformance sensitivity should be lower in insider-dominated boards and in boards that
include the company founder. By this token we should expect both low CEO turnover and low CEO turnoverperformance sensitivity in Italy. On the other hand, the
strong ownership concentration in Italy provides the majority shareholders with all
the incentives to actively monitor outside managers. This, in turn, would lead us to
expect both high turnover and high turnoverperformance sensitivity.
To determine the interplay of these two eects, we distinguish whether the CEO is
an owner. When the CEO is not an owner we expect the large shareholders in the
boards to exercise a close monitoring on the outside CEOs and replace those who
under-perform. When the CEO is an owner, however, we expect the entrenchment
eect to prevail.
In the following sections we analyze the probability of CEO turnover as a function of rm performance, of ownership characteristics (percentage of shares held
by the largest and second largest shareholder, the presence of a syndicate among
the main shareholders) and of CEO ownership. Before specifying our empirical strategy in this institutional setting we present our data.

3. The data
3.1. Sources
The identity of CEOs and the measures of accounting-based rm performance are
from Calepino dellAzionista (19871997), an annual publication on Italian listed companies. To eliminate discrepancies, information on CEOs is cross-checked with information from another stock-exchange yearbook, Taccuino dellAzionista (19871997),
and from company lings with CONSOB (the Italian Securities and Exchanges regulator). The data on the ownership structure are both from Taccuino dellAzionista
(19871997) and from company lings with CONSOB. Data on shareholders syndicates and on the percentage of shares in each syndicate are from company lings with
CONSOB and from Taccuino dellAzionista (19871997). Data on stock prices and
dividends are from the leading Italian business daily newspaper Sole 24 Ore (1987
1998). Finally, data on the changes of nominal capital (e.g. stock splits, free distributions of stocks, rights issues, etc.) are from Taccuino dellAzionista (19871997) and
R&S (1994), a yearbook specializing in nancial information about Italian companies.
3.2. Firm sample
We consider all rms listed on the Italian Stock Exchanges over the period 1988
1996. From this universe we have excluded banks, insurance companies and nancial
holding companies because, for accounting reasons, before 1993 their performance
measures are not easily comparable with those of the other companies. We have also

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eliminated rms that are either state-owned or that have been listed for only part of
the period. New entries during the period are ignored. Hence, our sample includes
only stayers, which can be observed for a relatively long period of time.
We choose to focus on stayers for three reasons: (a) As explained below, we need
at least three consecutive years in the data to construct our measures of turnover and
changes in performance; (b) directors contracts typically last three years and we are
interested in capturing also the turnover that occurs after contracts expire; and (c) we
lack the information to compute turnover after a rm is de-listed. The empirical consequences of the endogenous selection of stayers in the sample are discussed in the
next section. This gives us a sample of 60 rms, slightly less than one third of all
listed rms (the number of listed rms was 196 in 1988 and 215 in 1996). The average
sales of our sample rms in 1995 were 2166 billion lire, the average number of employees was 5913, and the average stock market capitalization was 894 billion lire.
3.3. Turnover
We construct a measure of CEO turnover at the rm level, as is done in the literature. Unfortunately, published sources do not allow us to identify the causes of
turnover, e.g. forced resignation, voluntary quit, death, illness, retirement, etc. Furthermore, we have no information on whether the company charter species a mandatory retirement age. Turnover is dened as the exit rate from the board between
year t and t 1. Thus turnover is the percentage of CEOs in a given board that left
the board during the period.
Since large companies may have more than one CEO, this percentage can take
values greater than 0 and smaller than 1. From this we have constructed the dummy
variable CEO TURNOVER that takes value 1 if turnover takes place, and 0 otherwise. Our main source (Calepino dellAzionista) reports information on board members only at the time of the survey (June 30 of each year). Therefore, we have no
information on spells on the board that start after the survey in year t and end before
the survey in year t 1. While this leads to a potential underestimate of turnover,
anectodal evidence indicates that cases of CEOs resigning, or being red, after only
a few months in the job are rare.
3.4. Information on CEOs
Since 1983, when data on rm tenure started to be registered by CONSOB, for
each CEO we have information on the number of years on the board, on the total
number of directorships held, and also on individual age. Using this information,
we have constructed the following company level variables for the CEOs: The average age (AGE); the average number of years (TENURE) spent on a board since
1983; and the average number of positions held in boards of other companies
(NUMBER OF DIRECTORSHIPS). For each rm we have also constructed the
variable NUMBER OF CEOs.
As mentioned above, we have classied CEOs according to whether they are controlling shareholders. To do so we have integrated information about ownership

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structure (see the discussions in Section 3.6) with recent company history from Taccuino dellAzionista and Sole 24 Ore, and constructed the dummy variable CEO
OWNERSHIP that takes value 1 when the CEO is a controlling shareholder or a
member of the controlling family, and 0 otherwise.
3.5. Performance measures
Turning to the measures of rm performance, we follow several previous studies
in using both accounting-based and market-based performance variables (see, for example, the discussions in Weisbach (1988) and Kaplan (1994a)). As an accountingbased measure we use the change in operating income, dened as earnings before
interest, taxes, depreciation and amortization, deated by rm sales (DEBITDA).
We choose EBITDA (the standard way of analyzing the operating protability of
a rm) rather than EBIT as in previous studies because the latter variable allows
some degree of choice of the depreciation.
We depart from previous literature also in that we divide the change in EBITDA
by rm sales rather than by the book value of rm assets (as, for example, Kaplan,
1994a; Weisbach, 1988). This is done for two reasons. First, in the Italian context
data on assets are less reliable than data on sales. Second, our sources do not report
asset data for all the rm-years. In addition to DEBITDA we also use STOCK RETURN, dened as the sum of the percentage capital gain in a year plus the dividend
yield for that year, relative to industry returns, which we capture in the regressions
with a set of industry dummies, and corrected to take into account changes in nominal capital (e.g. stock splits, free distributions of stocks, rights issues, etc.).
Given the characteristics of the Italian environment, both DEBITDA and
STOCK RETURN are noisy indicators of performance. However, since the measurement errors are not necessarily correlated, their combined use adds explanatory
power. All these measures refer to changes occurring between year t  1 and year t.
Given our denition of turnover we relate the probability of turnover to rm performance over the previous calendar year. Since we have only information on CEOs at
survey time, the interval between the measured performance and the instance of
turnover will be longer than one year in some cases and shorter in others. Additional
company information includes SIZE (the logarithm of real sales).
3.6. Ownership structure
We have information on the percentage of common shares held by both the
LARGEST SHAREHOLDER and by the SECOND SHAREHOLDER. Beside
common shares, rms in our sample often have two other types of shares outstanding: Preference shares (with or without voting rights, and with higher dividend
rights); and saving shares (without voting rights but with predetermined dividend
rights and dividend priority over the other types of share). Unfortunately we only
have information on common shares.
Furthermore, ownership disclosure is mandatory only for shares exceeding 2% of
rm capital, which makes it dicult to identify second largest shareholders when

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they are small. Missing values of the shares of the second shareholders (less than 3%
of the observations) have been assigned a share of 1.99%.
In companies where no shareholder has the absolute majority of votes, a shareholder syndicate often links the main blockholders. A shareholder syndicate is a coalition of shareholders aimed at exercising some of their rights in a predetermined
fashion (Art. n.10, Law 18/2/1992, n.149). The most common types of syndicates
are voting trusts, consultation agreements, and agreements limiting the transfers
of blocks of shares. CONSOB (2001) reports that syndicates are present in more
than half of listed private companies where the largest shareholder owns less than
25% of the shares. In our sample of listed rms, about 20% have a syndicate with
an average percentage of common shares slightly above 50%, and the correlation
between the percentage of shares of the largest shareholder and the presence of
a syndicate is )0.48. We have constructed the dummy variable SYNDICATE
which takes value 1 if the main shareholders are linked by a syndicate, and 0 otherwise.
Table 1 provides a summary of the variables, their denition, and their source.

3.7. Descriptive statistics


Turning to CEO related variables, the CEOs average age and tenure in our sample
are 53.75 and 4.89 years, respectively. Because tenure is only available from 1983 onwards, the left censoring in the data imparts an obvious downward bias on this variable. The average board size is slightly more than 10 members, similar to the size in
other one-tier board systems such as the US (Denis et al., 1997; Denis and Sarin,
1999) and Belgium (Renneboog, 2000). The average number of CEOs in the board
is 1.13, and the maximum number is 4.
Many directors sit on the boards of more than one rm. Interlocking membership
is a common feature in companies that belong to a group or are controlled through a
syndicate, and might lead to collusive behavior between directors (Bianco and Pagnoni, 1997). While directors hold an average of 1.30 outside directorships, the number of outside directorships falls to 1.09 for the CEOs.
Episodes of CEO turnover occur in slightly more than half of the rms in our
sample (31 rms). In the remaining rms, CEO turnover is always equal to zero.
Table 2 shows that, on average, about 10% of the CEOs leave their post during
the sample period. Table 2 also shows that CEO turnover is associated with the ownership characteristics of rms: In rms where the CEO is the controlling shareholder,
turnover is only 2.23%, signicantly lower than in rms where the CEO is not the
controlling shareholder (13.29%). This dierence is much larger than the one found
by Denis and Denis (1994) who show that top executive turnover in a sample of US
rms controlled by majority owner-managers is roughly one-half of the turnover of
the control rms. The presence of a syndicate is also associated with lower CEO
turnover, but the dierence is not signicant at the 5% level of condence (p-value
of the test: 0.260). Finally, Table 2 shows that CEO turnover is not signicantly
lower in rms where the largest shareholder holds more than the average percentage

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Table 1
Denition of the variables
Variable

Description

Source

Panel A: Board characteristics


AGE
Average age of CEOs

Company lings with


CONSOB
TENURE
Years spent on the board of a given company since 1983
Company lings with
CONSOB
NUMBER OF Average number of positions held in other boards by CEOs Company lings with
DIRECTORCONSOB
SHIPS
CEO OWNER- A dummy variable 1 when the CEO is a controlling
Authors classication
SHIP
shareholder or a member of the controlling family,
based on Taccuino
and 0 otherwise
dellAzionista
CEO
A dummy variable 1 if turnover takes place,
Calepino dellAzionista
TURNOVER and 0 otherwise
NUMBER
Number of CEOs
Calepino dellAzionista
OF CEOs
Panel B: Firm characteristics
DEBITDA
Annual change in earnings, before interest, taxes, depreciation and amortization, deated by sales in the previous year
STOCK REDened as the sum of the percentage capital gain in a
TURN
year and of the dividend yield for that year, corrected to take
into account changes in nominal capital (e.g. stock splits,
free distributions of stocks, rights issues, etc.)
LARGEST
Percentage of common shares held by largest shareholder
SHAREHOLDER
SECOND
Percentage of common shares held by second largest
SHAREshareholder
HOLDER
SYNDICATE A rm dummy variable 1 if the main shareholders are
linked by a shareholder syndicate, and 0 otherwise
SIZE

Logarithm of real sales

Calepino dellAzionista
Sole 24 Ore, R&S, Taccuino dellAzionista

Company lings with


CONSOB and Taccuino
dellAzionista
Company lings with
CONSOB and Taccuino
dellAzionista
Company lings with
CONSOB and Taccuino
dellAzionista
Calepino dellAzionista

of common shares (54%) and the second shareholder has more than the average percentage of common shares (9%).
To sum up, our data show that CEO turnover varies with important rm characteristics, such as CEO ownership, but is not aected by other characteristics, such as
the presence of a syndicate, or by ownership concentration. The dierences revealed
are based on the comparison of unconditional means and could simply reect the
presence of other unmeasured dierences, such as rm performance. For instance,
rms where the CEO is not a controlling shareholder could display higher CEO turnover in the sample because their average performance has been worse than the performance of rms where the CEO is an owner. To disentangle the multiplicity of
factors aecting CEO turnover, we need to turn to an econometric analysis of the
data.

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Table 2
CEO turnover by ownership characteristics
Percentage of CEOs leaving the board in the period
19881996
All rms

9.85 [395]

CEO is owner
CEO is not owner

2.23 [123]
13.29 [272] (0.000)

With Syndicate
Without Syndicate

7.43 [121]
10.92 [274] (0.260)

Largest shareholder owns


>54% of shares
6 54% of shares

10.92 [164]
9.09 [231] (0.526)

Second shareholder owns


>9% of shares
6 9% of shares

7.71 [160]
11.31 [235] (0.214)

Notes: The expression CEO is owner indicates that the dummy CEO OWNERSHIP 1. The expression
With Syndicate indicates that the dummy SYNDICATE 1.54% and 9% are the average share holdings
of the largest shareholder, and of the second shareholder, respectively. p-Values of the test whether means
are not signicantly dierent from each other within parentheses. Number of rm-year observations in
square brackets.

4. The empirical specication


To study whether and how turnover is related to rm performance and ownership
characteristics we specify CEO turnover in rm i at time t as follows:
CEO TURNOVERit ai qXit b CEO OWNERSHIPit
c SYNDICATEit
d LARGEST SHAREHOLDERit
e SECOND SHAREHOLDERit fi Pit
gi Pit jPit j ht eit

where CEO TURNOVER, CEO OWNERSHIP and SYNDICATE are dummy variables dened above; X is a vector of CEO characteristics; LARGEST SHAREHOLDER and SECOND SHAREHOLDER are measures of ownership structure
dened above; P and jPj measure changes in rm performance and the absolute
value of these changes, respectively; h is an aggregate time varying eect; e is an error
term; and a is a rm specic and time invariant eect.
The dummy CEO OWNERSHIP is introduced to test whether the presence of a
CEO owner leads to entrenchment as suggested by the descriptive evidence presented
in Table 2. Previous studies show that the empirical evidence on the relationship between executive ownership and turnover is ambiguous. On the one hand, in a sample
of US rms, Denis et al. (1997) nd that after controlling for poor stock performance both executive turnover and the turnoverperformance sensitivity are lower

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the higher the ocers equity ownership. They also document that turnover is lower
when the executive is a member of the founding family (see also Rosenstein and
Wyatt, 1997).
On the other hand, boards with signicant managerial ownership are more likely
to behave in the interest of shareholders (Morck et al., 1988) and are more likely to
have better information on strategies (Rosenstein and Wyatt, 1997). Furthermore, as
suggested by Franks and Mayer (2001), concentrated ownership may be more eective when it is in the hands of principals, for example families, than it is with agents.
Indeed in Italy ownership concentration is often of the rst type as owners are directly involved in rm management.
With the dummy SYNDICATE we want to test the eect of the presence of a syndicate on turnover. 1 Syndicates are designed to maintain control and may strengthen
entrenchment of the controlling shareholder. At the same time, companies with a
syndicate have more outside equity and are more exposed to the instability of coalition control, thus they are more contestable than companies with just one controlling
shareholder, which, in turn, may increase turnover.
By including the variable LARGEST SHAREHOLDER we want to analyze
whether ownership concentration is associated with better internal monitoring. If
large shareholders play an important monitoring role, turnover and the turnover
performance sensitivity should be stronger the larger the controlling shareholder.
Renneboog (2000), for example, nds that higher board turnover is positively correlated with ownership concentration in Belgian listed companies. Less clear-cut ndings for Germany emerge from Kaplan (1994b), who nds that the relationship
between the management board turnover and rm performance does not vary with
ownership concentration or with bank voting power. Similar results are found in another study on Germany by Franks and Mayer (2001) who, however, point out that
ownership structure matters in the dynamics of control: In transfers of ownership in
particular, large shareholders fare much better than minorities.
Previous studies on the US point to a monitoring role by large non-controlling
blockholders. Warner et al. (1988) nd some evidence, albeit weak, of monitoring
by blockholders. Stronger results are reported by Denis et al. (1997) who nd that
top executive turnover is positively related to the presence of an outside blockholder.
However, if the monitoring role of the second shareholder arises mainly in countries
with sophisticated legal systems, as Shleifer and Vishny (1997) point out, we should
expect the second shareholder to play only a marginal role in Italy. To test whether
this is indeed the case we use the variable SECOND SHAREHOLDER.
In the specication we include the product of the performance variable and its absolute value because we expect the sensitivity of CEO turnover to changes in rm
performance to vary with the size of these changes (in absolute value). There is some
evidence that the relationships between rm performance and top-executive compensation, and between performance and the turnover of top executives, are not linear.

1
More than 10% of the rms in our sample (7 out of 60) change status with respect to the presence of a
syndicate pact.

G. Brunello et al. / Journal of Banking & Finance 27 (2003) 10271051

1039

Kaplan (1994a) nds that both the turnover and the compensation of Japanese top
executives react dierently to positive and negative earnings, and in particular
boards are quite passive except in extreme circumstances. Similarly Warner et al.
(1988) document that a true performance disaster is required before boards actually
act. In a study on executive compensation in Italy Brunello et al. (2001) nd that the
penalty for prots decline is larger than the reward for prots increase.
When a captures unobserved or unmeasured rm characteristics, ignoring these
eects in estimation leads to biased results (Greene, 1993, pp. 482485). We deal with
this problem by introducing rm-specic dummies in the regressions. The use of
rm-specic dummies also captures the time invariant component of the selection
mechanism that allocates rms to stayers and leavers (rms that are quoted
on the Italian Stock Exchanges for only part of the sample period). Suppose that better-quality rms are more likely to be quoted continuously on the stock exchange
than other rms are. If quality has a time invariant component, rm-specic dummies will capture it. Notice that the inclusion of rm dummies means that the empirical analysis focuses exclusively on the sub-sample of rms (31 out of 60) that have
changes in their CEO turnover over time.
Assuming that the error term e has a normal distribution, we estimate the following probit model:


Pr CEO TURNOVERit 1 U Zit0 b

where Z is the vector of explanatory variables and b is the vector of the parameters
given in Eq. (1). We assign the value 1 to the dummy variable CEO TURNOVER
when the percentage of CEO turnover in the rm is higher than 0, and the value 0
otherwise. 2 All regressions include time dummies that control for economy-wide
shocks, including aggregate price dynamics. The tables below report neither the
coecient of these dummies nor the coecients of rm specic dummies.
Since Z 0 b has a normal distribution, interpreting probit coecients requires thinking in a non-standard metric. To facilitate interpretation, we choose to report in the
tables with estimation results the marginal eect on the probability of turnover of
each explanatory variable, rather than its estimated coecient. To illustrate, let Z1t
be a variable belonging to the vector Z and b1 the associated coecient. The marginal eect of Z1t is the change in the probability of turnover /Zit0 bb1 , where / is
the normal density function, when Z1t changes marginally.
Since we cannot identify and exclude episodes of CEO turnover due to retirement
from our data, we attempt to eliminate many instances of retirement by focusing
only on CEOs aged 70 or younger. 3 To further control for CEO turnover due to retirement, we include in the regressions both AGE and TENURE.
2
We have also run ordered probit regressions where CEO TURNOVER is allowed to take more than 2
values, with no signicant changes in the results.
3
In Italy there is no mandatory retirement system and old age pensions usually start at 65. By focusing
on CEOs 70 or younger we capture the fact that most CEOs to stay on the job after 65.

1040

G. Brunello et al. / Journal of Banking & Finance 27 (2003) 10271051

5. Results
5.1. The turnoverperformance relationship
We present our rst set of results in Table 3. The regressions in Table 3 exclude all
the rm year data with DEBITDA larger than 10 in absolute value (1 observation)
and with the CEO younger than 18. Since rms with no turnover in the sample period are excluded, we end up with 168 valid observations for at most 60 parameters
(9 year dummies 31 rm dummies 9 industry dummies at most 11 independent
variables).
In column 1 of Table 3 we show the estimates of the baseline empirical model that
includes both CEO and rm characteristics and DEBITDA in the vector of explanatory variables Z. In column 2 we present the estimates of the same regression
augmented with a non-linear specication of performance that includes both
DEBITDA and the product of DEBITDA, and its absolute value (DEBITDA 
jDEBITDAj).
The key result is that there is a negative and signicant relationship between CEO
turnover and change in operating income. This holds when DEBITDA enters in both
a linear (column 1) and a non-linear form (column 2). Therefore, a decrease in DEBITDA between year t  1 and year t increases the probability of CEO turnover between year t and year t 1. The relationship between CEO turnover and DEBITDA
is non-linear, as shown by the positive and signicant coecient (at 1%) attracted by
the product of the performance measure and its absolute value (column 2). Hence, a
negative change in DEBITDA increases the probability of CEO turnover, and this
eect declines with the absolute value of this change. This means that the penalty
for poor performance is less than proportional to the magnitude of the poor performance, reecting the fact that turnover is a bounded variable that can only vary in
the interval between zero and one.
The negative relationship between turnover and performance also holds when we
replace DEBITDA with STOCK RETURN and when we run regressions with both
measures. Column 3 of Table 3 reports the baseline empirical model with STOCK
RETURN, relative to industry performance, which we capture by including industry
dummies, and shows that CEO turnover is signicantly and negatively related to
stock return. We do not report the regression with the non-linear specication for
STOCK RETURN since the product of this performance measure by its absolute
value is never signicant. In column 4 we add STOCK RETURN to the specication
in column 2 and nd that, conditional on DEBITDA, positive values of STOCK RETURN signicantly reduce CEO turnover.
These ndings are consistent with previous empirical evidence that points to a
negative relationship between CEO turnover and rm performance measures (stock
returns, earnings, sales) in dierent corporate governance environments like the US
(see, among others, Coughlan and Schmidt (1985), Warner et al. (1988), Denis et al.
(1997) and the surveys by John and Senbet (1998) and Mayer (1998)), Japan
(Kaplan, 1994a; Kang and Shivdasani, 1995), Germany (Kaplan, 1994b; Franks
and Mayer, 2001) and Belgium (Renneboog, 2000).

Table 3
Probit estimates of the probability of CEO turnover, with rm dummies
Marginal eects

1
DEBITDA
DEBITDA  jDEBITDAj
STOCK RETURN
AGE
TENURE
NUMBER OF CEOs
NUMBER OF DIRECTORSHIPS
LARGEST SHAREHOLDER
SECOND SHAREHOLDER
SYNDICATE
CEO OWNERSHIP
SIZE
Pseudo R2
No. of observations
LR

Implied changes of
probability of turnover from column 4
2

)0.903 (0.387)

)2.188 (0.498)
1.060 (0.239)

0.001
0.015
0.108
0.009
)0.118
)0.228
0.215
)0.068
0.016

0.002
0.033
0.238
0.019
)0.256
)0.519
0.355
)0.146
0.035

0.41
168

(0.001)
(0.009)
(0.108)
(0.012)
(0.118)
(0.231)
(0.216)
(0.038)
(0.018)

0.41
168
0.00

(0.003)
(0.012)
(0.074)
(0.025)
(0.225)
(0.455)
(0.286)
(0.047)
(0.038)

)0.293
0.003
0.059
0.364
)0.026
)0.312
)0.529
)0.068
)0.250
)0.080
0.29
168

(0.115)
(0.007)
(0.012)
(0.104)
(0.044)
(0.423)
(0.940)
(0.141)
(0.060)
(0.080)

)1.676
0.822
)0.107
0.002
0.026
0.188
0.014
)0.192
)0.545
0.378
)0.105
0.030

5
(0.580)
(0.282)
(0.053)
(0.003)
(0.011)
(0.072)
(0.018)
(0.164)
(0.367)
(0.289)
(0.043)
(0.028)

)0.106
)0.025
0.0007
0.045
0.633
0.0006
)0.010
)0.019
0
)0.020
0.077

0.45
168
0.00

Notes: Estimates of the probit model PrCEO TURNOVERit 1 UZit0 b. Each regression includes time and rm dummies. The marginal eect of variable
Z1t belonging to the vector Z is /Zit0 bb1 , where / is the normal density function. Robust standard errors within parentheses. , and mean that the
estimated parameter is signicant at the 1%, 5% and 10% level, respectively. DEBITDA  jDEBITDAj is the product of DEBITDA and its absolute value. LR
is the p-value of the likelihood ratio test of the null hypothesis that the coecients of DEBITDA and DEBITDA  jDEBITDAj are jointly dierent from zero.
The regressions with STOCK RETURN (columns 3 and 4) include also industry dummies. Column 5 presents the change in the implied probability of CEO
turnover based on the specication in column 4 when the selected variable changes from its 25th to its 75th value and all other independent variables are set at
their mean value. For a description of the other variables see Table 1.

G. Brunello et al. / Journal of Banking & Finance 27 (2003) 10271051

Independent variables

1041

1042

G. Brunello et al. / Journal of Banking & Finance 27 (2003) 10271051

5.2. Turnover and ownership concentration


The regressions in Table 3 also include some variables related to the ownership
structure of the rm: LARGEST SHAREHOLDER, SECOND SHAREHOLDER,
SYNDICATE and CEO OWNERSHIP. The main result is that CEO turnover is signicantly lower when the CEO is a controlling shareholder. The size of the LARGEST
SHAREHOLDER and of the SECOND SHAREHOLDER do not have a signicant
impact on CEO turnover independently of the model specication (columns 14). The
lack of signicance of the coecient of the LARGEST SHAREHOLDER might be
the result of two contrasting eects. On the one hand, high ownership concentration
induces high monitoring, high turnover, and high turnoverperformance sensitivity.
On the other hand, it induces entrenchment, low turnover, and low turnoverperformance sensitivity. Of all the regressions of Table 3 SYNDICATE is statistically signicant at the 10% level of condence only in the model of column 4.
We interpret these results as indicative that it is the presence of a CEO controlling
shareholder that aects turnover rather than ownership concentration per se or the
presence of a large or second shareholder. These ndings conrm the descriptive statistics presented in Table 2. The role of CEO ownership as a determinant of turnover
is further analyzed later in the paper.
5.3. Turnover and CEO characteristics
In Table 3 we also show whether and how CEO turnover is aected by other CEO
characteristics. Independently of our measure of rm performance, the NUMBER
OF CEOs attracts a statistically signicant and positive coecient (columns 14).
While average AGE is never signicant (columns 14), average TENURE attracts
a signicant coecient (columns 14). In particular, turnover is higher the greater
the number of years spent by the CEOs in the position since 1983. We conjecture that
the presence of a three-year contract might bring an element of inertia: It is easier not
to renew a CEO when the mandate expires than to re him midterm. If we had data on
tenure that are not left censored, we could have tested this hypothesis by adding a
dummy equal to 1 to the regressions when the CEO is in the last year of his three-year
contract. Since tenure in our data is only measured from 1983 this option is precluded.
The NUMBER OF DIRECTORSHIPS is never signicant (columns 14) and therefore we nd no evidence that interlocking directorships make it more dicult to remove
a CEO. Also the coecient of rm SIZE is never signicant (columns 14), thus suggesting that small and large rms exhibit similar turnover. This is in contrast with empirical
evidence provided by Denis et al. (1997) for the US, who document that turnover is lower
in larger rms. The dierence, however, may be due to the fact that we use the log of real
sales as a measure of rm size while they use the log of book value to total assets.
5.4. Implied change in the probability of turnover
To facilitate the comparison between our ndings and previous literature we use
the specication in column 4 of Table 3 to compute the implied change in the prob-

G. Brunello et al. / Journal of Banking & Finance 27 (2003) 10271051

1043

ability of turnover for each independent variable (column 5). This computation is
done assuming that the selected variable changes from its 25th to its 75th percentile
value and conditional on all other independent variables remaining constant at their
respective sample means. To illustrate, the implied change in the probability of turnover associated to a 25th to 75th percentile value shift of Z1t is Ub1 Z1t;0:75 
Ub1 Z1t;0:25 , with all the remaining variables in the vector Z evaluated at their sample
means. This procedure is similar to the one used by Weisbach (1988) and Denis et al.
(1997) for the US.
We nd that a 25th to 75th percentile value change in DEBITDA, given stock
market returns, reduces the probability of turnover by 0.106. A similar change in
STOCK RETURN, given DEBITDA, has a smaller impact and reduces CEO turnover by only 0.025. This suggests that the probability of turnover reacts more to
changes occurring in an accounting-based measure of performance than in a market-based one, and indicates that boards look more at accounting measures of performance than at stock returns when they decide whether to replace the CEO. A
qualitatively similar result has been found by Weisbach (1988) for the US.
For comparability, we also compute the decline in the probability of turnover associated to a 25th to 75th percentile value shift in STOCK RETURN using the specication in column 3 that excludes DEBITDA and associated interactions from the
list of explanatory variables. In this case we nd a probability change equal to 0.133,
not reported in Table 3. This value is much larger than the value found by Denis et al.
(1997), who use a similar specication and estimate a decline in turnover equal to
0.015 in their sample of US rms. This is prima facie evidence that the sensitivity
of CEO turnover to performance is relatively high in the Italian institutional environment.
Returning to column 5 of Table 3, a 25th to 75th percentile value change in CEO
OWNERSHIP when the measures of performance are equal to their sample averages
reduces the probability of turnover by 0.020 (Table 3 column 5). This value is very
close to the one found by Denis et al. (1997), who estimate that the probability of
turnover declines by 0.023 when the dummy member of the founding family
changes from its 25th to its 75th percentile.
Finally, the probability of turnover increases signicantly when the number of
CEOs in the board and average CEO tenure increases. Adding one CEO to the board
(from 1 to 2) increases the probability of turnover by 0.633. When the CEO TENURE varies from its 25th percentile (2 years) to its 75th percentile (6.6 years), the
probability of turnover increases by 0.045 (column 5). This change is not small when
compared to the impact on turnover of the performance variables.
5.5. Alternative empirical specications
These ndings are robust to changes in the empirical specication. We check
whether the results are aected by multicollinearity by running simpler specications
that drop most CEO and rm characteristics and retain only rm and year dummies,
SIZE and our measure of performance, and nd no qualitative changes to our ndings.

1044

G. Brunello et al. / Journal of Banking & Finance 27 (2003) 10271051

We also check whether excluding rm dummies and including all available rms
in the sample (344 observations for 29 parameters) 4 signicantly aects our results
in Table 4, which presents the same regressions shown in Table 3 without rm dummies. The omission of rm dummies has the following main eects on our results
from Table 3. The estimated coecient associated with TENURE turns negative
and not signicant (Table 4 columns 14). The estimated coecient associated with
SECOND SHAREHOLDER remains negative but signicantly dierent from zero
(columns 14). The non-linear eect of DEBITDA on CEO turnover disappears
(columns 2 and 4). The implied probability changes associated with a change in
DEBITDA and in STOCK RETURN decline to )0.041 and remain broadly unchanged with respect to the value calculated in Table 3, respectively (column 5).
Finally, the probability change associated with changes in CEO OWNERSHIP increases in absolute value from 0.020 to 0.087 (column 5).
The decline in the eect of DEBITDA and the increase in the eect of CEO OWNERSHIP can be explained by the fact that, by dropping rm dummies from the regressions, we are including in the sample rms with no CEO turnover, which have
both a higher share of CEO OWNERSHIP and a lower average DEBITDA than
the rest of the sample. The share of CEOs that are controlling shareholders is 0.42
and 0.19 in the 176 rm-year observations with no CEO turnover and in the 168
rm-year observations with CEO turnover used in Table 3, respectively. 5
5.6. Turnover and CEO ownership
We test whether CEO ownership aects both the probability of turnover and the
sensitivity of turnover to changes in rm performance by interacting the dummy
CEO OWNERSHIP both with the non-linear specication of DEBITDA and with
STOCK RETURN. The results of the estimates are shown in Table 5, with and without rm dummies (columns 1 and 2, respectively). In either column the likelihood
ratio test of the joint signicance of these interactions rejects lack of signicance
at the 10% level of condence.
The results of these regressions conrm that the presence of a CEO controlling
shareholder reduces the probability of turnover. At the same time the coecients
of the interactions of CEO OWNERSHIP with both DEBITDA and STOCK RETURN are negative, which shows that the presence of a CEO controlling shareholder increases the sensitivity of turnover to performance. As illustrated in Table
6, however, the higher sensitivity when the CEO is owner applies to a very low probability of turnover. While the percentage change in the (conditional) probability of
turnover associated to a change in performance is higher when the CEO is owner,
the absolute change is so small that it can safely be disregarded.

4
The number of observations is 344 instead of 395, as reported in Table 2, because of 42 missing values
and 1 omitted outlier in the performance variables.
5
The average value of DEBITDA is 0.035 in the 176 rm-year observations with CEO turnover and
0.018 in the 168 rm-year observations with no CEO turnover.

Table 4
Probit estimates of the probability of CEO turnover, without rm dummies
Marginal eects

1
DEBITDA
DEBITDA  jDEBITDAj
STOCK RETURN
AGE
TENURE
NUMBER OF CEOs
NUMBER OF DIRECTORSHIPS
LARGEST SHAREHOLDER
SECOND SHAREHOLDER
SYNDICATE
CEO OWNERSHIP
SIZE
Pseudo R2
No. of observations
LR

Implied changes of
probability of turnover from column 4
2

)0.651 (0.162)

)0.742 (0.394)
0.219 (0.714)

)0.001
)0.005
0.090
0.004
)0.049
)0.240
)0.026
)0.113
0.011

)0.001
)0.006
0.096
0.004
)0.053
)0.254
)0.028
)0.120
0.012

0.219
344

(0.001)
(0.004)
(0.025)
(0.007)
(0.074)
(0.152)
(0.025)
(0.029)
(0.006)

0.219
344
0.00

(0.002)
(0.004)
(0.030)
(0.007)
(0.080)
(0.169)
(0.027)
(0.036)
(0.007)

)0.094
)0.001
)0.007
0.121
)0.003
)0.109
)0.422
)0.042
)0.148
0.007
0.172
344

(0.053)
(0.002)
(0.005)
(0.029)
(0.007)
(0.089)
(0.191)
(0.031)
(0.032)
(0.008)

)0.645
0.116
)0.048
)0.001
)0.005
0.094
0.004
)0.050
)0.275
)0.028
)0.117
0.011

5
(0.359)
(0.656)
(0.043)
(0.001)
(0.004)
(0.029)
(0.007)
(0.077)
(0.169)
(0.026)
(0.0036)
(0.007)

)0.041
)0.026
)0.003
)0.018
0.792
0.009
)0.005
)0.026
0
)0.087
0.14

0.224
344
0.00

Notes: Estimates of the probit model PrCEO TURNOVERit 1 UZit0 b. Each regression includes time dummies. The marginal eect of variable Z1t
belonging to the vector Z is /Zit0 bb1 , where / is the normal density function. Robust standard errors within parentheses. , and mean that the estimated
parameter is signicant at the 1%, 5% and 10% level, respectively. DEBITDA  jDEBITDAj is the product of DEBITDA and its absolute value. LR is the pvalue of the likelihood ratio test of the null hypothesis that the coecients of DEBITDA and DEBITDA  jDEBITDAj are jointly dierent from zero. The
regressions with STOCK RETURN (columns 3 and 4) include also industry dummies. Column 5 presents the change in the implied probability of CEO
turnover based on the specication in column 4 when the selected variable changes from its 25th to its 75th value and all other independent variables are set at
their mean value. For a description of the other variables see Table 1.

G. Brunello et al. / Journal of Banking & Finance 27 (2003) 10271051

Independent variables

1045

1046

G. Brunello et al. / Journal of Banking & Finance 27 (2003) 10271051

Table 5
Probit estimates of the probability of CEO turnover with interactions with CEO OWNERSHIP
Independent variables

DEBITDA
DEBITDA  jDEBITDAj
STOCK RETURN
AGE
TENURE
NUMBER OF CEOs
NUMBER OF DIRECTORSHIPS
LARGEST SHAREHOLDER
SECOND SHAREHOLDER
SYNDICATE
CEO OWNERSHIP
SIZE
DEBITDA  CEO OWNERSHIP
DEBITDA  jDEBITDAj  CEO OWNERSHIP
STOCK RETURN  CEO OWNERSHIP
Pseudo R2
LR
LR
No. of observations

Marginal eects
1

With rm dummies

Without rm dummies

)1.176 (0.498)
0.778 (0.329)
)0.077 (0.044)
0.003 (0.002)
0.021 (0.009)
0.207 (0.083)
0.017 (0.016)
)0.258 (0.159)
)0.753 (0.391)
0.291 (0.235)
)0.136 (0.045)
)0.019 (0.028)
)2.545 (1.550)
1.02 (0.728)
)0.186 (0.155)
0.48
0.00
0.00
168

)0.403
)0.167
)0.028
0.000
)0.003
0.087
0.005
)0.043
)0.225
)0.015
)0.114
0.001
)0.380
0.550
)0.155

(0.260)
(0.516)
(0.034)
(0.001)
(0.003)
(0.023)
(0.006)
(0.062)
(0.136)
(0.022)
(0.029)
(0.007)
(0.377)
(0.522)
(0.064)

0.26
0.00
0.07
344

Notes: Estimates of the probit model PrCEO TURNOVERit 1 UZit0 b. Each regression includes
time dummies. The marginal eect of variable Z1t belonging to the vector Z is /Zit0 bb1 , where / is the
normal density function. Robust standard errors within parentheses. , and mean that the estimated
parameter is signicant at the 1%, 5% and 10% level, respectively. DEBITDA  jDEBITDAj is the product
of DEBITDA and its absolute value. LR is the p-value of the likelihood ratio test of the null hypothesis
that the coecients of DEBITDA and DEBITDA  jDEBITDAj are jointly dierent from zero. LR is
the p-value of the likelihood ratio test for the null hypothesis of joint signicance of the interactions DEBITDA  CEO OWNERSHIP, DEBITDA  jDEBITDAj  CEO OWNERSHIP and STOCK
RETURN  CEO OWNERSHIP. The dierence in the number of observations between columns 1 and 2
is because with rm dummies we have only 31 rms with episodes of turnover.

Additional interaction terms that involve the variables associated with the ownership structure (SYNDICATE, LARGEST SHAREHOLDER and SECOND SHA
REHOLDER) are never signicantly dierent from zero, and we do not report these
regressions.
Notice in Table 5 that when we include the interaction of performance with CEO
ownership the variable SECOND SHAREHOLDER attracts a negative and signicant coecient. Together with the result in Table 4, this suggests that the presence
of a second large shareholder does not provide any monitoring role. Quite the contrary, it may facilitate entrenchment. This nding is in contrast with previous evidence on the monitoring role of large blockholders. Although we do not have an
explanation of why SECOND SHAREHOLDER may reduce CEO turnover we
oer the following conjectures. First, the monitoring role of the second shareholder
is likely to be ineective in an environment where the largest shareholder has on

G. Brunello et al. / Journal of Banking & Finance 27 (2003) 10271051

1047

Table 6
Estimated probability of CEO turnover
1

With interactions

PANEL A: DEBITDA
25% of DEBITDA (1)
Mean of DEBITDA
75% of DEBITDA (2)
Implied change in probability when
DEBITDA changes from its 25th
to its 75th percentile; (2)(1)
PANEL B: STOCK RETURN
25% of STOCK RETURN (3)
Mean of STOCK RETURN
75% of STOCK RETURN (4)
Implied change in probability when
STOCK RETURN changes from
its 25th to its 75th percentile; (4)(3)

3
Without
interactions

CEO
OWNERSHIP 0

CEO
Full sample
OWNERSHIP 1

0.275
0.075
0.053
)0.222

0.000
0.000
0.000
0.000

0.113
0.013
0.007
)0.106

0.131
0.075
0.048
)0.083

0.000
0.000
0.000
0.000

0.031
0.013
0.006
)0.025

Notes: Estimated probability of CEO turnover for dierent values of the performance variables when all
other independent variables are set at their average value. The calculations in columns 1 and 2 are based
on the estimates in column 1 of Table 5. The calculations in column 3 are based on the estimates in column
4 of Table 3. The implied changes in probability in column 3 are reported from column 5 of Table 3.

average more than 50% of the shares. Indeed, evidence of the monitoring role of outside blockholders has been found in rms where on average the rst shareholder has
less than 50% of the shares (see Denis et al. (1997), for evidence on the US, and
Renneboog (2000), for evidence on Belgium). Second, although we have information
on formal shareholders coalitions, the second shareholder may be informally linked
to the rst shareholder through reciprocal holding arrangements, which would increase the power of the latter. Since we do not have any variable that captures this
possible relationship we leave this hypothesis for future research.
In Table 6 we compute: (a) The estimated conditional probability of turnover at
the mean, 25th and 75th percentile value of DEBITDA and STOCK RETURN and
(b) the implied changes in probability when the performance variable changes from
its 25th to its 75th percentile. Both the estimated probability and the absolute probability changes are conditional on the other independent variables being evaluated
at their sample means. 6 In columns 1 and 2 of the table we show our ndings when
the dummy CEO OWNERSHIP is equal to 0 and 1, respectively. These two columns
are based on the specication of the model reported in column 1 of Table 5. In column 3 of Table 6 we show the estimated probability of turnover and the implied

These probabilities are dierent from the unconditional probabilities reported in Table 2.

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probability changes reported in Table 3 and based on the specication of the model
without interactions.
The key result in Table 6 is that the conditional probability of turnover in the full
sample is entirely driven by turnover in rms where the CEO is not an owner: Turnover in rms where the CEO is an owner is simply zero, independent of whether we
take the average, the 25th or the 75th percentile value of our measures of performance. In spite of the fact that changes in performance do aect proportionally more
turnover in companies where the CEO is an owner, as suggested by the higher performance sensitivity found in Table 5, the absolute change in the probability of turnover is too small to be noticed.
It takes substantially negative changes in DEBITDA or in STOCK RETURN to
obtain turnover probabilities higher than zero in rms where the CEO is an owner.
For instance, it is not reported in the table that when DEBITDA is at its 10th percentile value and STOCK RETURN at its mean value, the probability of turnover is
0.008 where the CEO is an owner and 0.490 where the CEO is not an owner. This
strong entrenchment eect extends to the turnover of all top executives as documented in another study of board turnover in Italian listed companies (Volpin, 2002).
In sum this governance system seems to be eective when the CEO is not an owner
precisely because boards are dominated by insiders with large stakes. Insiders with
large stakes have access to information, can inuence strategies and have all the incentives to monitor and replace under-performing outside CEOs. In contrast, when
the CEO is owner this governance system exhibits all the negative aspects of insiderdominated boards with large private benets.

6. Conclusions
We have studied the turnover of CEOs in a sample of Italian listed companies.
The novelty of this study stems from the characteristics of the Italian system of corporate governance that make boards of directors dominated by insiders.
We nd that insider-dominated boards are no exception in the sense that there is a
statistically signicant and negative relationship between rm performance and CEO
turnover, and that this relationship is not linear. Importantly, we also nd that the
turnoverperformance relationship depends on the ownership structure of rms.
If the crucial indicators whether governance is operating eciently within a rm
are the coecients dening the probability of turnover as a function of performance,
our study oers a mixed picture of the functioning of the Italian system. Our rst
nding is that the implied change in the probability of CEO turnover for the entire
sample when the performance variable changes from its 25th to its 75th percentile is
fairly large in comparison with the ndings of previous studies on US rms. This fact
is quite surprising given the dierent composition of boards in the two countries:
Often outsider-dominated in the US and insider-dominated in Italy.
Our second nding, however, is that being the owner or a member of the controlling family insulates the CEOs from disciplinary mechanisms. We show that the
(conditional) probability of turnover when the CEO is an owner is close to zero,

G. Brunello et al. / Journal of Banking & Finance 27 (2003) 10271051

1049

and it takes a substantial change in the performance measure to have a positive probability of turnover. Indeed, our results indicate that the probability of turnover in the
whole sample is entirely driven by turnover in rms where the CEO is not the controlling shareholder. We interpret this last result as evidence of the monitoring role
played by the majority shareholder on outside managers.
A broader implication of our analysis for the governance literature is that the separation of the large shareholders from the CEOs does not necessarily cause loss of
eciency. This is in contrast with the prediction of the principalagent literature that
incentives should be most powerful when principal and agent coincide. Besides motivating eort to alleviate moral hazard, boards have also the task of selecting the
right CEO/replacing the wrong CEO. In corporate governance environments where
the potential for exploitation of private benets is large and the risk of entrenchment
is strong, the task of removing an underperforming CEO is likely to be better performed when the CEO is not a large shareholder. One way in which this is achieved is to
have powerful inside shareholders on the board. Thus, insider-dominated boards
may alleviate rather than exacerbate agency costs.
Furthermore, our study oers new evidence of the importance of the accounting
measure of performance relative to stock return in the boards decision whether to
change the CEO. We do not nd support for the descriptive evidence that the presence of a shareholder syndicate among the main shareholders facilitates managerial
entrenchment, or for the monitoring role of large blockholders documented in studies on top executive turnover in the US.
With additional data this research could be extended to integrate the analysis of
CEO and board turnover and executive compensation in Italian rms. Turnover policy is indeed part of the overall compensation policy of the rm, which has only recently begun to receive academic attention in Italy. In a recent study on executive
compensation in Italy Brunello et al. (2001) report that the variable component of
pay accounts for a smaller proportion of total executive compensation than in Germany, the UK and the US. In the mid-1990s the base salary was about 74% of total
compensation of an Italian CEO, annual bonuses about 20%, employee benets
about 2%, and stock plans and (seldom) stock options the remaining 34%. The
same study reports weak payperformance sensitivity (an increase of prots by 1 billion lire raises the pay of upper and middle rank executives by only 31,000 lire). This
sensitivity is higher when the rm belongs to a multinational group, is owned by foreign capital and is listed on the stock exchange. It is dicult to establish direct links
between our results on CEO turnover and these ndings on upper and middle manager compensation. However, an integrated analysis of turnover and compensation
could shed light on the interplay between monetary and non-monetary incentives for
top executives in family rms.

Acknowledgements
We are particularly grateful to two anonymous referees whose comments greatly
helped to improve the paper. We would also like to thank Marcello Bianchi, Fahad

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G. Brunello et al. / Journal of Banking & Finance 27 (2003) 10271051

Khalil, Loriana Pelizzon and audiences at the Universities of Bologna, Roma-Tor


Vergata, Cattolica-Milan, Siena, IGIER-Bocconi, Bergamo, Brescia, the conference
on Corporate Governance, Contracts, and Managerial Incentives at Humboldt University in Berlin, the Third CONSOB Seminar on Italian Financial Services, the
EARIE meeting in Turin, and the British Accounting Association Conference on
Corporate Governance at Sheeld University for helpful suggestions. Geraldine
Ludbrook, Franco Mariuzzo, Nicola Menis and Lorenzo Rocco provided valuable
research assistance. Financial support from the National Research Council (CNR)
Grant No. 96.01407.CT10 and from the Italian Ministry for the University Grant
No. 981378383-002 is gratefully acknowledged. The usual disclaimers apply.

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